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Posts Tagged ‘Case-Shiller’

Repeat Sales, Fancy Math and Shaking The Tree

September 20, 2007 | 12:26 pm | | Public |

There was a great Page One article in the New York Sun by Bradley Hope today Amid Market Uncertainty, a New Hedge that covers Radar Logic’s property derivative product RPX. (note: I head up Radar Logic Research). As a good reporter should, Bradley gathered a quote from Karl Case, one of the creators of another property index, the S&P/Case-Shiller® Home Price Indices that has been available for more than a year.

While I have met the widely quoted Yale economist Robert Shiller and recently appeared with him at Lincoln Center at the Real Deal New Development Forum, I have not had the pleasure of meeting his longtime associate, Karl Case.

Mr. Case, who has been involved with research into real estate indices, said the RPX caters more toward dealers, but includes more “unpredictable random error” by using complex mathematics to calculate the values on a daily basis.

“They add fancy math, but they don’t add data,” he said.

Coming from a respected economist, I am surprised by his lack of understanding of RPX, and for making this type of comment, especially when RPX methodology is transparent and fully available on the Radar Logic web site.

Professor Case has really got it backwards. RPX has added data which is specifically excluded from the S&P/Case-Shiller® Home Price Indices:

  • Condos – “Condominiums and co-ops are specifically excluded” (from CSI)
  • New construction – “new construction is excluded” (from CSI)

It is fair to say that the real estate markets in the metro areas covered in their index have been significantly influenced by condo and new construction activity.

In addition:

  • Foreclosures – “subsequent sales by mortgage lenders of foreclosed properties are candidates to be included in repeat sale pairs” (from CSI) How is this determined?

As far as the fancy math comment goes, all I can say is: “good grief.” The RPX proprietary methodology was created by an affiliate of Radar Logic, Ventana Systems who for more than 20 years have been creating and deploying robust, comprehensive models of a complex environment for strategic visibility and control and whose current projects include modeling the national airspace system, research and development productivity, national economy, energy, climate, disease epidemiology and intervention. Ventana is run by the brightest people I have ever met.

Stay tuned!


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A New York Story: Pop Goes The Country

September 18, 2007 | 10:11 am | | Public |

The bi-annual real estate issue of New York Magazine had been talking about a crash since 2003. However this year, they apply a more reasonable discussion to the burning question: Why is New York different and how long will it last? (since their new owners took over a few years ago, editorial content has returned the magazine to “must-read status”).

Aside: Of course I love the fact that the average sales price for Manhattan 2Q 2007 presented in the Prudential Douglas Elliman Manhattan Market Overview that my firm authors of $1,333,316 is on the cover (something about loving numbers).

While I am not in total agreement with all the content, it is a refreshing approach because the article tries to present both sides in a best and worst case scenario format. The take away is weighted toward the pessimistic view.

There is discussion of

Hyman Minsky’s ingenious model of asset bubbles, economic stability breeds riskier and riskier investors: First come the “hedge borrowers,” who play with their own money; they are followed by “speculative borrowers,” who have enough cash flow to keep the lender at bay but not enough to cover the principal investment, and finally “Ponzi borrowers,” who are, as the name suggests, borrowing to refinance other debts they can’t meet, in the wild hope that the market will keep climbing.

Of course, New York had very little speculation during the New York housing boom so this applies more to borrowing habits of market participants.

The article references economists I admire and have quoted in the past: Joseph Gyourko, Christopher Mayer, Todd Sinai, Edward Glaeser, Robert Shiller and Nouriel Roubini (whenever I am feeling too optimistic) plus several others. Brad Inman coins the phrase: “Irish Effect.” They also included my friend Noah Rosenblatt, who runs Urbandigs.com and is someone I recently discussed the housing market for hours after midnight on the tarmac of Atlantic City’s airport on a grounded jetBlue flight from the recent San Francisco Inman conference (how cool is that?).

Worst Case: In this scenario, a full-fledged credit crunch rips through the system. The August employment figures, showing no growth for the first time in four years, are the beginning of a serious downward trend. The economy heads for a hard landing, and an all-out recession ensues.

Best Case: In this instance, the current liquidity problem is contained by the end of the year. Employment figures pick up in September. Global growth continues.

A correction to the article is needed: The widely quoted Case Shiller Index doesn’t include co-op and condo sales as indicated in the article, which is 96.9% of the Manhattan sales market, nor does it include new development and foreclosures.

This just in: Lehman’s net declines, but less than analysts expectations.


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[Getting Graphic] Getting Real Nominal On US Housing

August 27, 2007 | 12:01 am | |

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related images(s).

David Leonhardt of the New York Times, does a very cool breakdown of the Nation’s housing markets, to prove incorrect the mainstay argument that housing prices, based on OFHEO numbers (the official government stats), have not shown an annual decline since their inception in 1950. Because OFHEO excludes all transactions with non-conforming mortgages (currently over $417,000), a large swath of data is excluded, especially in the coastal cities where housing prices are higher.

It should be pointed out that OFHEO also includes the appraised value of refinance transactions, which can be the majority of the sales data captured by Fannie Mae and Freddie Mac in a certain period of time.

He instead relies on the numbers provided by Case Shiller which do not exclude non-conforming loans like OFEHO does (however, Case Shiller does exclude new construction, condos and foreclosures, which have been key components of the housing market boom of the past 5 years).

David does a wonderful job at explaining the methodology in the video and the interactive graphics are amazing. He emphasizes using inflation in the presentation of housing prices.

Click here for interactive graphic and short video on the US housing market.

Source:NYT



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OFHEO/Case-Shiller In Hodgepodge Smackdown

June 27, 2007 | 8:41 am | |

S&P released their Case-Shiller April 2007 index today A Hodgepodge of Declining Growth Returns in Home Prices According to the S&P/Case-Shiller® Home Price Indices [pdf] showing further housing market weakness.

A review of the decline in home price returns on a regional level shows no region is immune to the weakening price returns,” says Robert J. Shiller, Chief Economist at MacroMarkets LLC.

[question: is “hodgepodge” a macro econ term? I’ll check with Yoram Bauman.]

The index showed the fourth straight drop and the biggest decline since the index started in 2001. An index of 10 metropolitan areas fell by the most in at least 16 years. The Bloomberg article also has a heading that describes the index as most accurate. One gets the impression that a lot of effort is being spent by the S&P public relations machine to sell the credibility of the S&P/Case-Shiller index. News coverage tends to include something like what was presented in the Bloomberg piece:

The S&P/Case-Shiller index and another gauge by the Office of Federal Housing Enterprise Oversight track individual homes through repeat sales and more accurately reflect price trends, economists say. The measures from Commerce and the Realtors group can be influenced by changes in the types of homes sold. Higher sales of cheaper homes relative to more-expensive properties will bias the figures down.

OFHEO may feel threatened by the S&P/Case Shiller Index full court press and felt the need to substantiate their validity through a [pause while holding breath and say slowly] white paper called “A Note on the Differences between the OFHEO and S&P/Case-Shiller House Price Indexes [pdf]” written by Andrew Leventis dated June 22, 2007.

(Hap tip to a colleague who has lost more Blackberries than anyone on the planet.)

The fact that a government agency would go on the offensive to dress down a private sector competitor is unprecedented. Since the S&P/Case Shiller Index hasn’t done anything wrong, I can’t come up with a reason for this strategy.

Of course OFHEO is likely feeling the heat on several fronts, ranging from suggestions that they be replaced by another agency, their lack of oversight during the Fannie Mae accounting scandal and large bonuses just announced to their executives. They have been releasing other research works lately as well.

OFHEO basically says they are better than Case-Shiller because:

  • Case-Shiller excludes 13 states, including three of the fastest appreciating: Idaho, Montana and Wyoming data
  • Case-Shiller has incomplete coverage in 29 states and doesn’t clarify what specific areas are omitted.
  • OFHEO has more complete data.
  • Case-Shiller does not fully disclose their methodology.

Case-Shiller is a monthly index and OFHEO is a quarterly index, plus OFHEO only includes transactions with mortgages less than $417,000 (include values of refinance mortgages) and excludes a large swath of metro area prices.

Case-Shiller and OFHEO Indexes are similar because:

  • They are both repeat sales indexes.
  • They exclude new development, co-ops, condos and multi-families (CSI excludes foreclosures and flips)

Its a battle between government (OFHEO) and academia (Case-Shiller). I am hoping for a response from Case-Shiller although I doubt there will be one.

The benefit to the real estate consumer in all this whining and grandstanding exercise is more awareness of what these indexes actually offer and possibly allow for more transparency in the future. In other words, a hodgepodge of possibilities.


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[Matrix Zeppelin] Negative carry, when they crashed, risque calender, 212, buyers quibble, explain to the bank, WAY more, Repeat sales, slippage, derivatives

April 6, 2007 | 8:57 am | |


Well, the Matrix Zeppelin has been in storage lately, its owners trying to figure out whether to rent or buy a garage for it. In the meantime, Matrix readers have been busy trying to touch up their photos of the market, trying to decide whether it looks better or worse than before:

  • We’re all familiar with the rapid escalation of home prices over the last 10 years. For most Americans, their homes have been the best and in many cases the only investment that they have made in their entire lives. Some have gone so far as to invest in several homes and have endured ‘negative carry’ on the cash flow in anticipation of leveraged capital gains a few years down the road. But where does it stop? Can housing continue to increase at twice the Consumer Price Index for the next 10 years?

  • According to Steven Roach, the dot com stocks only made up about 6% of the markets when they crashed, but sub-primes made up about 10% of last years real estate market.

  • As a Realtor and a professional photo retoucher/photographer, I would NEVER alter a photograph in such a way that it could be perceived as misrepresentation. I am very careful about such things. In the past I have adjusted the color, contrast, brightness etc. (say if I took the image on a cloudy day). I have removed trash cans from front yards, laundry and toys from bedroom floors, even a risque calender or two from office walls…but never ever have I given the impression that the house was in better repair, the yard was more manicured or the neighborhood was more desireable. We have to be very careful about doing anything that could come back and get us later.

  • I live and work in 10021 and would hate to see any changes. It’s not status (I swear)it’s just that as I age (mature?) I find myself less and less tolerant of these kinds of upheaval. My home and office phones are 212 (I rule!) but my cell has gone from a 646 to the foreign sounding 347. An agent I work with, an otherwise fine gentleman, has a 212 cell number. he is hated office wide for this.

  • As a broker when dealing with condos i use the square footage given in the offering plan and then say approximately. Reasoning being the offering plan to me is the official number and as you said everyone else who comes in to measure will get a different number. When buyers quibble my response is that all square footage is not the same or more clearly 1000 sf in one property will seem larger than 1000 sf in another. It comes down to usable space, how the space presents etc and then, what are you buying square footage or a home?

  • Whenever I appraise a condo, I always measure. Most times the official measurement is very close. I presume this is because the architect has to certify the plans…Nonetheless, I generally use the official measurement when doing the sales comparison approach. Why? Because that is what the typical buyer will consider. But I always include both measurements and explain to the bank the reason for the discrepancy (e.g., they included exterior walls, different method).

  • You fail to realize that “homeownership” can only continue if employment does. What it sounds like you’re really saying is “I have a job and a house so I don’t care about other people.” Having higher employment is WAY more important for this country than high home “ownership.” People can always rent a place to live, but it’s more important that they be able to eat and clothe themselves than buy a house.

  • Repeat sales method takes each sale and compares the price paid versus its prior sale and then you combine the change in aggregate over a specific period – shiller apparently adjusts or factors for changes in the house – ie an extension. I’m not sure how this is done and it won’t consider an extensive renovation, for example nor does this index consider foreclosures or new development (its the first time sold so there is no repeat).

  • Case-Shiller picks up foreclosure sales between the bank and the market, not the mortgagee and the lender. From the methodology paper: “… Although identified foreclosure transfers are excluded during the pairing process, subsequent sales by mortgage lenders of foreclosed properties are candidates to be included in repeat sale pairs.” New developments are not included because the methodology requires at least two recorded transactions prior to admmission into the index. Since Case-Shiller and OFHEO are repeat sales based indexes, there is “slippage” in the sense that untraded iventory is not absorbed in the indexes. (As correctly noted above.) If there was an appraisal method, then a value could be guess-timated. However, over the long run, all these properties will eventually transact and will then be accounted for in the indexes.

  • There is a Case-Shiller index that tracks national housing prices. The index symbol is SPCSUSA. It updates quarterly instead of monthly. It is being traded as a forward over-the-counter (OTC), not as a listed futures contract. The forward market for expiration February 2010 is -12% bid, -4.25% offered. The derivatives market views nationwide housing prices as expressed by this Case-Shiller index as substantially lower looking out three years.


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S&P/Case-Shiller Home Price Indices/January 2007 – Dire?

March 28, 2007 | 7:34 am | |

Professor Robert Shiller has leveraged his repeat sales index by developing a new monthly national housing market report with Standard & Poor called S&P/Case-Shiller® Home Price Indices. I find that repeat sales indexes can be very inaccurate and lag the market because they don’t reflect changes in the houses being measured for multiple sales, the data set is too thin, and the response to sudden changes in a market is delayed. This particular report addresses composites of 10 and 20 metro areas so its not really a national housing market indicator since metro areas are distinctly different markets than outlying areas. However, the index seems to address one of their biggest flaws:

Their purpose is to measure the average change in home prices in a particular geographic market. They are calculated monthly and cover 20 major metropolitan areas (Metropolitan Statistical Areas or MSAs), which are also aggregated to form two composites – one comprising 10 of the metro areas, the other comprising all 20. The indices measure changes in housing market prices given a constant level of quality. Changes in the types and sizes of houses or changes in the physical characteristics of houses are specifically excluded from the calculations to avoid incorrectly affecting the index value.

“The annual declines in the composites are a good indicator of the dire state of the U.S. residential real estate market,” says Robert J. Shiller, Chief Economist at MacroMarkets LLC. “ The 10-City and 20-city Composites are both showing negative annual returns, a striking difference from the 15.1% and 14.7% returns they reported this time last year. The dismal growth in the 10-City composite is now at rates not seen since January 1994.”

Its the first time in 11 years that home prices go negative. A possible theory for the weakness is relating to the interplay between new home sales and existing home sales. I am not sure I buy into it but its interesting to consider nevertheless.

The lag in timing on this index is really showing the markets around the November 2006 election since the study is based on January 2007 closings. At -0.2% and -0.7% for the 10 and 20 city composite, its is a significant drop from the 15% annual appreciation rates seen a year earlier but not unexpected.

I know economists are paid to worry, and I am not cheerleading here, but does Professor Shiller have to use the word dire in his description?

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[List-o-links] At The Golden Gate: I Left My Heart In New York

December 4, 2006 | 11:35 am | |

For the next two days, my posts will be a bit sporadic. I am in San Francisco for business. Its one of my favorite places. The weather is perfect but I am desperately trying to stay on New York time. Its hard to get up at 3:30 am PST, no matter how you try to convince yourself.

Here’s a few links that may be of interest.


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Housing Futures Need To Be On A High Enough Frequency To Be Heard

July 18, 2006 | 11:56 am | |

At Matrix, I have been following the CME Housing Indexes that are based on the work of the noted economist Robert Shiller and others. Bob has been discussing this in various venues around the country as a way for the investors to hedge their bets.

In Days of Housing Futures Past [TheStreet.com] Howard Simons makes the case that these housing contracts, based on ‘old’ data and with sizable size issues, aren’t such a good idea. Its a really well thought out article.

Here’s why:

  • Past performance may not predict future results
  • All futures markets are based on the principle of indifference.
  • Futures markets also have a large measure of insurance built into them.

This is not the case with housing futures. Each of the contracts is based on the S&P/Case-Shiller (CSI) home price indices. They cover metropolitan areas of Boston, Miami, New York, San Diego, San Francisco, Washington, D.C., Chicago, Las Vegas, Denver and Los Angeles, as well as a composite national index. That in itself does not present a problem; we have close to 25 years of experience trading index-based, cash-settled futures on things such as stock indices.

Frequency is the problem:

Unlike a stock index that is refreshed several times a minute, the CSI indices are released at 1:15 p.m. Central Standard Time on the last Tuesday of every calendar month. The release is of necessity for data collected for previous months. For example, the August report will cover the data collected for April, May and June in each reporting region.

Housing futures are being marketed as an indirect way of playing rising long-term interest rates. The answer is simple: If you think rates are going higher, sell bond futures or something similar. They are a direct play on interest rates.

The basic premise of the author is that housing futures are really not a play on the future, but rather a play on the past since the basis for the index is relatively dated by the time its used. The low volume of home sales tracked in the index also make it less reliable.

Perhaps we should hedge our bets on cheddar cheese and non-fat dry milk instead [Matrix]?


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Housing Going Dutch In Taking The Long Term View

March 31, 2006 | 12:01 am |

A hat tip to [Calculated Risk] for pointing me to this post on [Economist’s View] that discusses Shiller’s long-term views on the current housing boom and presents much of his recent paper Long-Term Perspectives on the Current Boom in Home Prices.

Robert Shiller looks at over 100 years of data and asks the question every homeowner wants to know: what is the short-term and long-term prognosis for real estate values? The news isn’t reassuring, but luckily risk markets are being developed to help people hedge or buy insurance against the risk that Shiller unveils. His controlled series using housing along a canal is fascinating.

For the free full version of Shiller’s work as a download which requires registration, go here.

Professor Shiller has been calling for crash of housing for the past 5-6 years and he has focused on more pyschological reasons. He is consisent with his point, similar the way the Economist magazine is on this position. Bearish on housing.

Dean Baker, Center for Economic and Policy Researh also has a paper out: The Menace of an Unchecked Housing Bubble

An unprecedented run-up in the stock market propelled the U.S. economy in the late nineties and now an unprecedented run-up in house prices is propelling the current recovery. According to Dean Baker, like the stock bubble, the housing bubble will burst. Eventually, it must. When it does, the economy will be thrown into a severe recession, and tens of millions of homeowners, who never imagined that house prices could fall, likely will face serious hardships.

For the free full version of Baker’s work as a download which requires registration, go here.

I subscribe to me Baker’s email list and find much of the publication very informative as well. He’s bearish on housing too.

UPDATE

To digress a bit:

Although Austin Powers made a case against the Dutch, (wink) here’s one to invoke sympathy. In Lisa Chamberlain’s article Pressing a Claim for Dutch History [NYT] she discusses the eminent domain taking of land by the Metropolitan Transit Authority from the Collegiate Church Corporation which has owned it for 282 years.

The controversies covering eminent domain takings appear to be on the rise as government authorities have more lattitude than ever before. More to come.


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What Do Cheddar Cheese, Nonfat Dry Milk and Housing Have In Common?

March 24, 2006 | 12:05 am | |

Besides the hot futures and options vehicles nearly every American trades such as cheddar cheese and nonfat dry milk (just kidding), starting March 31st, investors can now trade housing index futures as well.

The indexes will be called the S&P Case-Shiller Metro Area Home Price Indices and use calculation techniques developed by economics professors Karl Chase and Robert Shiller, author of the influential book “Irrational Exuberance.”

The press release provides a good overview: S&P Set to Launch Metro Area Home Price Indices.

There will be a composite index weight by market size and one for each of the following ten cities: Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York Commuter Index, San Diego, San Francisco and Washington D.C. I would venture a guess that the NY Commuter Index includes New York City, the outlying suburbs of Westchester and Fairfield Counties, Long Island and Northern New Jersey.

This index won’t render the OFHEO Housing Price Index or the various NAR indexes obsolete because this covers 10 metro markets rather than entire country.

However, it looks like the methodologies employed in this index are far better, with less bias than the NAR and OFHEO numbers. Here’s a series of white papers on the Chicago Merc’s site that sums it up nicely as follows:

_National Association of Realtor (NAR) Indexes_
– NAR indexes quoted as median home values and do not use repeat sales methodology
– Median values do not address homeowner returns and may readily be skewed if composition of housing stock changes, e.g., new luxury subdivisions are introduced to area

_Office of Federal Housing Enterprise Oversight (OFHEO)_
– Uses repeat sales methodology
– BUT … sample confined to Fannie & Freddie conforming mortgages and, therefore, skewed to low end of housing market
– Only perhaps 1/6th of California housing sold with conforming mortgages
– Uses appraisal data to supplement sample … appraisals tend to be upwardly biased?

What does a housing index that can be traded do for us?


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The Wealth Effect: Stocks vs. Housing

August 19, 2005 | 8:12 am | |

With the discussion today comparing stocks versus real estate, its worth taking another look at a research paper from a few years ago: Comparing wealth effects: the stock market versus the housing market [Note: PDF] written by professors Case, Quigley & Shiller. In their abstract they state:

We find a statistically significant and rather large effect of housing wealth upon household consumption.

The wealth effect is defined as:

The premise that when the value of stock portfolios rises due to escalating stock prices, investors feel more comfortable and secure about their wealth, causing them to spend more.

The impact on consumer spending is more than double when tied to the value of their home rather than their stock portfolio. This has broad implications for the economy and is likely of significant concern to the Federal Reserve in their recent policy of reigning in the threat of inflation.

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