Posted by Jonathan J. Miller -Thursday, December 7, 2006, 8:15 AM
I got the idea for this post after trading emails with David Leonhardt of the New York Times the other day as he worked in his interesting Economix column: The Hidden Truth About Home Prices [NYT] and the companion article More on Housing Prices [NYT]
Its very difficult for most consumers, government officials, academia and real estate professionals to get a real world gauge on how a real estate market is actually doing. Tried and true methods all seem to have some sort of flaw and when a market is in transtion, the changes become even more pronounced. And then throw in the source of the information, with the presence of spin, makes the effort even more daunting. Those covering the market, whether it be Big Media and the blogosphere tend to gravitate towards whatever is released that day.
There are two schools of thought on housing stats:
- Price indexes- These are generally based on repeat sales of the same property over time or an aggregate analysis of housing prices, with some adjusted for seasonal changes and/or inflation.
- Housing prices – These results are based on an aggregate summary of the sales that transferred during the period and can be skewed by the mix.
You’ve got producers of indexes telling you that prices are less meaningful, yet users of the indexes often view them as a “black box” and don’t grasp how the information was calculated (do we hear “seasonally adjusted?”) Indexes tend to be created for macro markets because the data set needs to be large. Cycnicism has been a detriment to reliance on indexes.
Those that rely on housing prices tout that they are the real thing yet most resources for housing prices tend to be non-economist types, trade groups and real estate firms, because they tend to be easier to generate and report than an index. There are a growing number of market studies put out in the public domain by local real estate brokers and agents (and of course, appraisers) to try to bridge the gap between the national stats and local markets. However these reports are often limited by the size of the data, limited understanding of what the data really means and are clouded by their intentions.
There are generally four sources of housing stat interpretation:
- Government – namely Commerce/Census/OFHEO
- Economists – Chicago Mercantile Exchange (Shiller) and other “Starconomists” like Roubini, Zandi (Moody’s) and others.
- Real estate brokerage trade groups and firms – The National Association of Realtors (NAR) is the primary source of information on national housing and local brokerage firms. Regional MLS systems and brokerage firms are the other primary provider.
- Online services like Zillow.com, RealtyTrac, ZipRealty release housing stats but generally don’t provide historical trends to include for perspective.
- Real estate appraisers, consultants and analysts I would fall into this category as well as other housing stats from other markets presented on Matrix. We tend to relay on actual housing prices and interpret them without the trade group or incentivized spin, but its not without its faults either. The data is generally influenced by mix of housing stock that sells so its important that this group bridges the gap between the results and actual conditions.
Local, National and Internet:
- National housing stats are reported religiously by nearly all national media outlets yet don’t have a link to local markets. What happens in a neighborhood may or may not comparable to national markets and if the results are consistent, its really coincidence. NAR has touted national housing stats as an argument for real estate as a good investment but it doesn’t reflect local volatility.
- Local housing markets tend to have smaller data sets and are more affected by the mix of what sells. They can have a powerful affect on local moods but are often written by marketing departments as public relations pieces for trade groups and firms with a vested interest in the results and how it affects the bottom line.
- Internet is an important delivery mechanism for real estate stats, but are often less thought out than traditional sources because many producers of this information don’t have direct real estate experience, but rather have online experience from other industries. This isn’t necessarily a bad thing, because bad habits and bias may not be developed but often, inappropriate uses of month over month stats exagerate certain market conditions.
Pitfalls and/or spins betrays most sources:
- New home sales – Government stat quality is suspect and not necessarily unbiased. You just have to take a look at the widely quoted housing stats like New Home Sales from the US Commerce Department [pdf]. You just have to read an excerpt from the October release to see what I mean: This is 3.2 percent (Â±11.2%)* below the revised September rate of 1,037,000, and is 25.4 percent (Â±10.0%) below the October 2005 estimate of 1,346,000.
- Median sales price (National Association of Realtors) – There is an emphasis on the national numbers in their series of reports on new and existing home sales. They do break up the country into quadrants, but all real estate is local. They have such an opportunity to gain the public trust but usually provide hard spin to the results and are very inconsistent in the commentary from month to month.
- Sales price index (OFHEO) – The median sales price includes refinance data and excludes sales with non-conforming loans (mortgages greater than $400,000).
- Housing price index (Chicago Mercantile Exchange) – Robert Shiller’s repeat sale index lags the market by about 4 months and is targeted towards investors, not consumers. Trading volume is growing but is still too small to really provide a sense of market direction.
politics real estate is local, but reporting of larger data sets is easier but less relevant, its very difficult for the consumer of real estate market information to know what, in fact, the truth is.
At the end of the day, real estate truth is open to interpretation.