Tuesday, May 25, 2010

Case-Shiller vs. Actual Sales Data for Detroit Metro

According to the Case-Shiller Home Price Index data released today, Detroit-area home prices decreased by -4.62% from March 2009 to March 2010. 

According to the Michigan Association of Realtors, we have the following March-March increases in average home prices for the Detroit metro areas included in the Case-Shiller Detroit metro area (and year-to-date January-March data in parentheses, since the Case-Shiller index uses a 3-month moving average), along with the entire state:

Detroit: +43.99% (+29.33%)

Lapeer: +17.38% (+6.29%)

Livingston: +7.87% (-2.28%)

Macomb: + 11.89% (+7.08%)

Oakland: + 21.51% (+23.14)

Entire State of Michigan: +9.86% (+10.76%)

Here's a description of the Case-Shiller methodology, which says that:

"The S&P/Case-Shiller Home Price Indices are designed to be a reliable and consistent benchmark of housing prices in the United States. Their purpose is to measure the average change in home prices in a particular geographic market.  The monthly S&P/Case-Shiller Home Price Indices use the “repeat sales method” of index calculation – an approach that is widely recognized as the premier methodology for indexing housing prices – which uses data on properties that have sold at least twice, in order to capture the true appreciated value of each specific sales unit.

To calculate the indices, data are collected on transactions of all residential properties during the months in question. The main variable used for index calculation is the price change between two arms-length sales of the same single-family home."

In other words, it looks like the Case-Shiller index controls for quality of housing, and tries to compare the same exact house sold in two different periods.  While that might be theoretically the premier methodology, it should also be recognized that there could be significant departures between prices from the Case-Shiller indices and average price data from housing sales. 

For example, all indications from the Michigan Association of Realtors are that home prices have increased in the Detroit area from a year ago, by double-digits in most cases for March, and year-to-date all areas except Livingston have experienced price increases, with double-digit increases for Detroit (+29.33%) and Oakland (+23.14%).  Home prices have also increased statewide as well, both for March and for the first quarter (Jan-Mar). That's quite a different story than the -4.62% decrease in Detroit area home prices according to the Case-Shiller for March. 

Comments welcome. 


At 5/25/2010 5:22 PM, Anonymous Benny The Man said...

Okay, here is an anecdote, but I think the housing market is back, at least in Los Angeles.

From LA Curbed, a very good real estate blog that chortled many times over "price chops."

J"ust when you think the market is flat and that pricechops rule the day, comes word that a stampede is underway. Or so says our tipster, reporting from the trenches of a recent brokers open house at Museo Lofts. This is that building on Ridgeley Drive in mid-Wilshire, a 52-unit condo project brought to you by the same people behind Universal Lofts and Studio 837. A few months ago, the prices were advertised in the $400,000s and up. We're inclined to think our tipster is authentic and not shrilling. He writes: "Not sure if you've heard what's going on with Museo Lofts. They got 15 offers on the first day they were open (Tuesday a week ago), and continued to have such overwhelming response that by Sunday, they had cancelled the open house and had someone there turning people away. Only people who had already submitted offers were being allowed in." Our tipster also sends word that sales team are "absolutely" going to be raising prices on any remaining units from the pre-sale prices before they go into the MLS. I'm praying they don't try to jack up the prices on units with offers on them..." The voicemail at Museo Lofts is full and not accepting messages...."

Housing is coming back in L.A. Now, it is not on fire. But if you want to ell your hosue, you can. Prices hit bottom last year.

At 5/25/2010 5:26 PM, Blogger W.E. Heasley said...

Wow! Does this mean Detroit homes are now selling for $1.50 rather than a $1.00 ?!?

Oh no, Granholm will want a “windfall appreciation tax” of at least 50%. Jennifer needs $$ as she is running out AGAIN.

At 5/25/2010 8:25 PM, Anonymous DeeBee9 said...

Is there any chance the "Realtors" have a vested interest in a rosy scenario? Probably not since they spend their lives being scrupulously honest in their dealings. But, you never know. (As the saying goes, "You can tell a salesman is lying if his lips are moving!")

At 5/25/2010 8:58 PM, Anonymous Anonymous said...

Tell the whole story. Up from what ? Who in their right mind want's a house in Detroit at any price. Seems to me that not too long age you were showing charts on how LOW Detroit prices were. What am I missing ? D.

At 5/25/2010 9:30 PM, Anonymous Apu said...

Of course there's a "significant departure" of average (or median) house prices of sales data from constant-quality indexes such as Case Shiller, FHFA and FACL data precisely because the latter control for quality and the former does not. The latter indexes are less volatile to changes in the mix of homes being sold (size, location, quality, price level). Average and median prices are poor tools for analysis and are never used by serious economists. Only realtors get excited about them. When they're up, the market is hot. When they're down, it's time to buy. Typical realtor BS.

None of these measures take into account the REAL price of homes adjusted for the tax credit and interest rates. In states with high property tax rates where base adjusts to selling price, the impact of declining tax expenditures also has to be considered. This is especially relevant in California where 18% of US mortgages are originated and which has Prop 13 capping tax increases. California also has extremely high historical price volatility, indicating a propensity toward bubbles resulting from expectations, speculation, and restrictions on desirable land.

In short, the constant quality indexes attempt to control for a major determinant of house prices: quality. Failing to control for quality violates ceteris paribus in analysis. Failing to address the other factors in demand and supply further violates ceteris paribus.

Short of running rather sophisticated econometric models of house prices, applying basic knowledge of the determinants of demand suffices. With interest rates near a record low, tax credits, falling effective tax rates, a high volume of distressed sales, significant speculator activity, significant government subsidies through the FHA, and expectations of future appreciation, we should be expecting extraordinary house price gains. The fact that house price growth is tepid or negative implies that the unemployment rate, difficulty obtaining credit, damaged balance sheets, uncertainty, expectations of more foreclosures, and a generally weak economy are a huge drag on the housing market.

When you look at the entire market, you see a severely damaged situation that is not and will not improve any time soon. That is not to say there can't be big winners in this environment, but the losers are outweighing the winners. Banks are going to have to write down a lot of assets this year and foreclosures and short sales are going to hit hard.

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