Put a gag on Chicken Little
Part 1: Real estate sky is not falling
By Bernice Ross, Friday, May 23, 2008.(This is Part 1 of a two-part series. Read Part 2, "Where's the beef in home-price reports?")
"Real estate prices are plummeting!" "Foreclosures are at an all time high!" "Prices predicted to decline another 20 to 30 percent!" These are the headlines that we face daily. It's no wonder that there's a crisis in consumer confidence. The truth of the matter is that the sky is not falling. In fact, contrary to what the press is reporting, real estate prices are stabilizing, and in a wide number of areas they are actually showing signs of improving.
The S&P/Case-Shiller Index is the gold (scare) standard these days for those who report on the housing market. News agencies began using this index about two years ago rather than the indices provided by OFHEO (the Office of Federal Housing Enterprise Oversight) and NAR. These same news sources often fail to report the numbers provided by companies such as Realogy.
If each of these resources came to the same conclusion about the market, there would be no issue. The challenge is that NAR, OFHEO and Realogy all reach the same conclusion: Prices are down nationally less than 1 percent and, in many areas, prices are actually increasing.
In contrast, the most recent numbers from the S&P/Case-Shiller Index (reported on April 29, 2008) reach a very different conclusion:
"Data through February 2008 … show declines in the prices of existing single-family homes across the United States … The 10-City Composite posted a new record-low annual decline of 13.6 percent and the 20-City Composite recorded an annual decline of 12.7 percent."
According to David M. Blitzer, chairman of the Index Committee at Standard & Poor's, "There is no sign of a bottom in the numbers. Prices of single-family homes continue to drop across the nation. All 20 metro areas were in the red for February-over-January reading. In addition, 19 of 20 MSAs (Metropolitan Statistical Areas) are reporting negative annual returns. The monthly data show that every one of the MSAs has now declined every month since September 2007, marking six consecutive months."
Now compare these numbers to those reported on April 22, 2008, by OFHEO. The OFHEO "Monthly Price Change Estimates for the U.S. and Census Divisions from January 2008 to February 2008" drew the following conclusions:
1. Overall U.S. prices were UP 0.6 percent.
2. Regions reporting increases include the Pacific (0.3 percent), West North Central (1.3 percent), West South Central (0.7 percent), East North Central (1.6 percent), East South Central (1.2 percent), New England (2.2 percent), and Middle Atlantic (0.1 percent.)
3. Only two regions reported declines: (Mountain -0.6 percent) and South Atlantic (-0.2 percent).
In other words, a whopping 77 percent of the areas in the U.S. reported a price increase between January 2008 and February 2008! The S&P/Case-Shiller Index, in contrast, concludes that 95 percent of the MSAs reported negative returns. Of course, there's no mystery as to which of these two reports has been in the press.
What accounts for this difference? Both the S&P/Case-Shiller Index and the OFHEO index use "repeat valuations." In other words, to be included in the calculations, a property must sell twice. The difference in the two sets of sales prices is the basis for each index. OFHEO's sales-price data include only homes that have conforming mortgages. The Case-Shiller Index covers property sales with both conforming and jumbo mortgages.
Andrew Leventis (June 2007) attributes part of the difference to the fact that OFHEO "does not lend additional weight to more expensive homes; each pair of home valuations is given equal weight in the index estimation, regardless of the price level of the home." In contrast, Case-Shiller applies a "weighting" formula before it calculates it data. The challenge with making decisions about how to "weight" certain factors introduces human judgment into the equation and dramatically increases the probability for creating errors.
NAR and Realogy, using a different approach from OFHEO and S&P/Case-Shiller, arrive at essentially the same conclusion as OFHEO, i.e. that the average price of homes in the U.S. was down less than 1 percent. Their approach is to total up all the sales, divide by the number of units, and then calculate the arithmetic average (mean) as well as the median. In stark contrast to the S&P/Case-Shiller approach, the technique that NAR and Realogy use includes all properties and is much more objective.
From a scientific point of view, when two sets of data produce conflicting results, you look to other sources and/or methodologies to see which data set is supported. In this case, the NAR and Realogy data supports the OFHEO data. It's the S&P/Case-Shiller index that lacks corroboration from other sources.
Unfortunately, the press almost universally quotes the S&P/Case-Shiller Index, and it may be the least accurate housing-price index. Next week's column explains why.
Bernice Ross, national speaker and CEO of Realestatecoach.com, is the author of "Waging War on Real Estate's Discounters" and "Who's the Best Person to Sell My House?" Both are available online. She can be reached at bernice@realestatecoach.com or visit her blog at www.LuxuryClues.com.
Ross will speak at Real Estate Connect in San Francisco, July 23-25, 2008. Register today.
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Submitted by Teresa Boardman on May 23, 2008 - 4:24am.
Real estate is so local. I work two different markets in one city. In one market, downtown condos values have gone down in the last tow years, I would estimate by close to ten percent. The other market I work in is older homes, typically purchased by move up buyers. Prices have gone up slightly, I estimate by about 3% in the last year. As for the foreclosures we have too many and there are more each day. My market is mixed and I can't make any blanket statements about the city. I don't see a particularly rosy picture right now, and have adopted the same wait and see stance that my bjuyers have.
Submitted by Leon d'Ancona, B.T.L., M.T.L. on May 23, 2008 - 5:03am.
Bernice is right as usual. This month alone we identified 2391 cities with positive real estate news. If more of us would focus on the bright side of things instead of the gloom and doom that prevails, more buyers would perhaps get off the fence of procrastination and buy a home.
Submitted by Mack Perry on May 23, 2008 - 5:40am.
While many markets have been taken on a roller coaster ride by speculative buying, the Atlanta market is primarily fueled by jobs and relocation. We have not experienced the drastic increases in values the some areas have, but fortunately we have not had the decreases in value either. Teresa, I have to agree with your comment that real estate is so local.
Submitted by Joseph Ballarino on May 23, 2008 - 6:11am.
Real Estate activity is up in Southwest Florida, however prices still are declining.. Browse this blog for details
http://blog.amerivestrealtyofnaples.com
Joe Ballarino
President & Founder
Submitted by Ralph M on May 23, 2008 - 6:27am.
And the national media gets their stats from.......REALTOR.COM......Thanx Realtor.com ps, I heard very little from the national media about Reology losing 130+ million dollars??
Submitted by Todd Anderson on May 23, 2008 - 6:39am.
Todd Anderson
www.YouInParkCity.com
Unfortunately our media focuses on fear and horror stories. It seem very rare that a story-line gets picked up that says "everything is fine".
Submitted by Lenn Harley on May 23, 2008 - 6:40am.
I believe the focus on price is quite misleading. Our prices, Maryland and Northern Virginia are down, significantly, but not sufficiently to bring first time home buyers off the fence. Lending criteria are more difficult. Further, prices that went up 100% and then came down 15-20% don't bring prices to the consumers' qualifying range.
Prices went up 100% in 4 years and incomes went up about 20% in the same time. THAT is the big disconnect.
We need to look at more than price. We need to look at the steadily decline in the number of homes SOLD.
Lenn Harley, Broker
Lic: MD & VA
Homefinders.com
http://www.homefinders.com
Submitted by Tim Condon on May 23, 2008 - 7:22am.
Nobody likes to be the subject of generalizations - not even media. The Washington Post reported on housing prices today, and specifically referenced in the first part of the article that the OFHEO index is 'considered the most comprehensive measure of value in the U.S...'. The article also pointed out that the data is skewed by areas such as California, Florida and Nevada. Later in the article, the S&P/ Case-Shiller index is referenced, but the article AGAIN mentions that the government index is more comprehensive.
Not all media is out to report sensationalist stories, and making broad statements to that fact is a bit of sensationalism in iteself, now isn't it?
http://www.washingtonpost.com/wp-dyn/content/article/2008/05/22/AR200805...
Tim Condon
Director, Classified Advertising
The Washington Post
Submitted by Matthew Dollinger on May 23, 2008 - 7:32am.
Bernie,
Great post and thanks for taking such an informative stand on this topic. I have argued the same point in the office, online, and other blogs as well. For our market of Chicago, (and other metropolitans I'm sure) the largest controversy stems from lack of local knowledge. My IT department and I actually tried to combat this and put together our own market report focused specifically on local information. (it can be viewed at www.atproperties.com/marketreport) We broke the city into the existing neighborhoods, took a look at some of the sub-neighborhoods, allowed the consumer (or agent) to search by housing criteria (AT, DE, beds, baths, price) and worked with a PR company to draw insights into the results. Our goal was to create the most comprehensive (maybe not the prettiest in its beta stage!) report that really compared apples to apples.
Thanks again and keep up the good work.
Matthew Dollinger
Performance Coach
@properties, Chicago IL
www.theyoufactor.com
Submitted by Jeffrey Nunn on May 23, 2008 - 9:00am.
I agree that the Case-Shiller index is a joke. That said, why doesn't NAR make that point to the media and get them to use data from the other 3 reputable sources, themselves included, that support each other and draws the same conclusion?
Submitted by Sean OToole on May 23, 2008 - 10:07am.
What I don't understand is why Realtors think falling prices are so bad for their business.
BUYERS WANT LOWER PRICES!!! And we should WANT people to be able to comfortably afford a home without time-bomb financing.
Now that prices are finally falling we are starting to see a return of activity. We will have an even more robust market when prices are at levels where rental properties cash flow and first time buyers don't need exotic loans.
Pollyana's can be as dangerous as chicken littles. Just ask homebuyers that bought, or brokers that were leasing additional offices in 2005.
As a regular source of foreclosure news I realize there are many that would rather not hear it. Unfortunately the bad news on foreclosures isn't over and a gag order won't change the outcome.
I'm fortunate to have quite a few Realtor customers that are both optimistic and realistic. They've embraced the reality of foreclosures, are optimistic about the return of affordability, and very busy closing deals.
Sean O'Toole
Founder / CEO
ForeclosureRadar.com
Submitted by Wenceslao Fernandez Jr on May 23, 2008 - 11:15am.
I agree very much with Bernice Ross and can't wait for the follow-up article on the subject. Our media surely likes chicken!
However, I also share the point of view of Sean O'Toole from ForeclosureRadar.com.
Lower prices and continued low rates have made it easy for many buyers to return to the closing table, yet consumer confidence is still lacking because of the media's relentess apetite for chicken.
Our market in Miami was overheated. No secret there. Yet, true and smart buyers AND investors alike are buying again.
My humble opinion is...in our Miami market, single family homes may be at a bottom, while condos in certain sectors, buildings with issues or that do not offer "rare air", will lag.
The rest, will continue to edge upward as the elections near and thereafter.
With articles like this one and the recent one form WSJ, we should get buyers and sellers educated and their confidence restored.
So...to all the BUYERS out there...enjoy the low prices and low interest rates - while they last!
For the rest...continue to enjoy your chicken!
www.MiamiRealEstateKing.com
Certified Distressed Property Expert
Miami-Dade County, Florida.
Submitted by Michael Espiritu on May 23, 2008 - 11:18am.
I hate to tell you this but the media did not create the siuation that the real estate industry finds itself in now.
The Case-Shiller index is not indicative of the true real estate market. In some of the top Metropolitan areas we have seen huge price declines. Inventory is still high. Anyone who argues that we don't have have price declines in many areas is hiding from the truth.
The largest county in The United States,(San Bernardino County)has seen 20 % drops in value from March 2007. That figure is a fact.
Some areas of the U.S. have seen stable pricing and even increases in value.
Here is my take on all this...
-More buyers can afford to buy because of the continuing price declines. (Buyers)
-Rents will cover mortages again resulting in get this, POSITIVE INCOME! (Investors)
-So what if there is more inventory. That means there are more choices for the client (the person who we work for.
-Forclosures are up- That opens up a niche for REO's(Agent/ Brokers).Become an REO specialist!
The bottom line is adapt or quit! Make way for the driven, tech-savvy, unafraid, aggressive
agents who don't let headlines and sound bytes deter them from having a successful and profitable business.The days of putting a sign in the yard and wait for the deal to close are over! Get over it!
Michael Espiritu
Broker
Copeland Wealth Management / CWM Real Estate
Submitted by Jonathan Smoke on May 23, 2008 - 12:43pm.
I appreciate Bernice's observation that we should be leveraging all available information to draw conclusions about the market. The repeat sales methodology used by Case-Shiller and OFHEO has its merits, most notably that it better controls for period to period changes in the type of homes sold as well as controlling for significant changes in quality and/or size.
But as Bernice highlighted, the weighting applied by Case-Shiller can cause distortions. In particular I am concerned that the greater weights they apply to shorter interval sales means that they are also weighting foreclosed bank owned properties more heavily in their indices. That could be a major source of the more negative view of the markets they cover.
See the note I wrote last month at http://www.housingintelligence.com/economics/s-p-case-shiller-home-price....
Submitted by chis eliopoulos on May 23, 2008 - 12:56pm.
This is a "make feel good article".
There is available much data that can be manipulated and interpreted any which way one wants.
The fact of the matter is, that sales and prices are declining and will continue to decline, as inventories are increasing and lending practices are tighten.
In CA there is not one area that had indicated a price increase in the last six months.Now the multi family market is starting to soften and as the recession progresses (we are in a recession regardless what the "official" definition is)commercial real estate will decline also.
Now this is a good thing, as real estate had out priced it self as a product in my local market.The gloomier the news the better, as more product will become affordable.This is the time to get back to basics and see real estate for what it is:a long term investment and not a vehicle for speculation as was treated the last five years, producing the devastating results that you see in the form of foreclosures today.
Submitted by RK Ruthman on May 23, 2008 - 3:26pm.
Herd up the flocking agents.
You can't gag Chicken Little by running around like a bunch of chickens with your heads cut off.
...Isn't that right?
NAR's Mission and Vision
Mission
The core purpose of the NATIONAL ASSOCIATION OF REALTORS® is to help its members become more profitable and successful.
Vision
The NATIONAL ASSOCIATION OF REALTORS® strives to be the collective force influencing and shaping the real estate industry...
There are TWO SIDES to every story, and I pay attention to all THREE. Which means I include my professional take on the housing market, and present it as such.
Forget algorithms, pie charts, and the he said/she said about the housing market, "what is the Homebuyer's confidence level in real estate professionals?"
When the NAR mission statement is..."to help its members become more profitable and successful," do consumers believe we are looking out for their best interest when we tell them it is a good time to buy a home?
In my professional opinion, I do think it is a good time to buy a home.
What I expect from the yin yang of the real estate. Home prices will go down, but mortgage rates will go up to make up for the properties banks are holding onto presently. (Someone has got to pay.)
Then, you have the former home owners who walked away from properties. They won't be buying any time soon because of the mark on their credit history. They will be renting.
To be cemented in either extreme, Standard & Poors vs. NAR, would be career suidice.
Why "recite"? Have "insight".
That is the only way to stay in front of the herd, I mean flock.
Submitted by bob jones on May 27, 2008 - 9:11am.
Bust out the pompoms, it is the monthly realtor head-in-the-sand convention. We're going through the largest housing plummet in history, so why not just pretend it's all the media's fault and Case-Shiller is the bad graphs?
You should google "United States housing bubble". Check the wikipedia article. It will give you a wealth of knowledge about the true nature of the housing market and the fundamentals that support it. I say this not to be condescending, but from the article and the responses above, it's obvious that many agents have absolutely no clue what is going on.
Submitted by Dennis Pease on June 1, 2008 - 6:31pm.
This is a great topic Bernice, thanks for posting it.
By the way in my area, the Oregon real estate market is healthy and stable although our DOM has increased, prices are stable and interest rates are great. Buyers are purchasing homes and the people I talk with that seem to be hesitant to purchase now are concerned about what they have seen on the news. The news media reports scare people, hmmm...
I have very strong opinion of what I see the media reporting.
Tim Condon of The Washington Posts said; "Nobody likes to be the subject of generalizations - not even media."
Although he is correct, sometimes generalizations can be accurately revealing.
IMO the liberal media is not going to publish anything positive this election year about the economy including the real estate market.
I believe the lack of accurate statistics being reported or the reporting of statistics for the hardest hit markets has more to do with politics than real estate.
The negativity of media reports encompasses nearly all of our economy and world events, with real estate just playing the role of one component. It is a much bigger story than simply real estate.
How often do you see news articles about the great mortgage rates we have been experiencing for months?
When was the last time you heard the media report how strong a certain real estate market is? What you do hear is negative, about everything.
My prediction is that until the elections are over you will not see much positive press about the housing market regardless of the truth.
Submitted by bob jones on June 2, 2008 - 7:07am.
Denise, Portland prices are down 10% from a year ago. This is not a liberal conspiracy. The market sucks and the economy is in a LOT of trouble. I'm a Republican, but you really embarrass me when you blame this on the liberal media. Oh, and if you want numbers, not that you'd be able to interpret them, here you go:
http://housing-watch.com/regionview.aspx?city=Portland
Submitted by Not Given on June 4, 2008 - 11:15am.
Unfortunately, you did not give a reason for invalidating the CS findings. You only highlighted your preference for indices that support your view. Specifically, you took ANNUAL CS numbers and compared them to MONTHLY OFHEO numbers. This is one shade of grey away from deception.
If you take the last twelve months from February, OFHEO reports a 2.5% decline in the US and CS 12%. Why the stark difference? Because the OFHEO data set is limited to ONLY Fannie and Freddie conventional conforming mortgages; the entire jumbo market is excluded. This eliminates wide swaths of data in Boston, New York City, LA/OC, San Francisco, Seattle, etc.
It is reasonable to say that conventional conforming home sales market is relatively stable while the market as a whole is under pressure. But you do not do that.
In fact, you further devalue your argument by saying:
"The challenge with making decisions about how to "weight" certain factors introduces human judgment into the equation and dramatically increases the probability for creating errors."
The weightings you deride are designed to minimize the impact from change in value that is not from the change in market. Further, it is much less human judgment and much more objective mathematical algorithms that decide how to weight factors. ( I suggest you read the CS methodolgy document.) Broadly this is called normalization of data - something that NAR and Realology do not do with any rigor.
Further, you are incorrect when you say:
"From a scientific point of view, when two sets of data produce conflicting results, you look to other sources and/or methodologies to see which data set is supported."
This is asinine. OFHEO, NAR and CS use different data and thus observations & findings are inherently incomparable. All three say vastly different things. OFHEO says that conventional conforming home sale prices were stable from January to February. CS is saying all home sale prices declined irrespective of mortgage type. The NAR says average price changed - clearly the least sophisticated of data analysis.
As far as methodology, sale pair is clearly superior. The change in value of something is the change in the purchase price minus sale price and value added (like remodeling). Averages do not - CANNOT capture this information.
Please do not speak about science or math that you do not understand under guise of expert.
Submitted by Commercial Mortgage Loans - Privately Funded - MasterPlan Capital LLC on August 13, 2008 - 4:52am.
Excellent article, it’s good to read a responsible opposing viewpoint.
Too often good news is not allowed to surface because it doesn’t fit the story line.
That’s not to say that the bad news isn’t real, but that it’s allowed to dominate the debate.
MasterPlan Capital LLC
Commercial Real Estate Investment Bankers
Commercial Mortgage Lending - Equity Financing - Asset Management
Apply for a Commercial Motgage Loan Online - Quick Answers - Fast Closings - Professional Service.