Posted by Jonathan J. Miller -Monday, October 24, 2011, 2:00 PM
I’ve written about the problems with the Case Shiller Index at length – here’s my 3 part series I wrote during my DC/Baltimore MRIS gig:
- Metro DC/Case Shiller Disconnect (Part I of III): Timing
- Metro DC/Case Shiller Disconnect (Part II of III): Seasons
- Metro DC/Case Shiller Disconnect (Part III of III): Prices Lag Sales
The index wasn’t created for the widespread consumer use it currently enjoys. It was designed for Wall Street to hedge the housing market. The right idea but the methodology wasn’t effective – only one investment bank ended up buying the rights to use the index.
What is the reason for investor reluctance to hedge housing using this or other indices?
Too much transparency. That sounds weird even though the CS index methodologies are partial hidden in a “black box”, the index and competing indexes end up being highly predictable.
It’s tough for options traders to get jazzed about any kind of housing index when the significant lag time between market activity and reporting allows for reasonable predictions of where the index will move.
A lot has changed since 2006 when the index began to be traded. Real estate data moves a lot faster now. The CS index, with its extensive use by media, has merely evolved into a tool for data companies to leverage their own predictive analytics.
Zillow happens to be one of many analytics firms and economists that can get public relations traction by predicting the results of the index results days in advance:
Zillow: Case-Shiller likely fell 3.8% in August [HousingWire]