SHADES OF GREEN
Home-price data has its flaws
Market anomalies painting skewed picture, index producers acknowledge
By Chris Pummer
Last update: 7:28 p.m. EDT May 1, 2008
SAN FRANCISCO (MarketWatch) -- Commonly cited measures of U.S. home prices are overstating the degree to which the vast majority of Americans' home values have declined in the last year, producers of two of the most widely tracked indexes acknowledged this week.
Top officials with the National Association of Realtors and Standard & Poor's, which issues the S&P/Case-Shiller Home Price Index, agreed this week their monthly reports are giving imprecise readings of price changes at all levels -- national, state and regional -- due to rare market conditions that are skewing survey results.
The NAR reported last week that U.S median home prices fell 7.7% in March from a year ago. The decline resulted largely from a market anomaly -- a steep decline in costlier home sales due to tighter lending standards and high jumbo-mortgage rates, coupled with a foreclosure-driven spike in cheaper homes.
"If there are a lot more homes sold on the low end and fewer on the high end, the median price is bound to drop dramatically," NAR Chief Economist Lawrence Yun said. "In normal times, a median price would reflect typical homeowner equity changes, but these are not normal times. The jumbo (mortgage) market is frozen and the buying activity is more concentrated in lower-value homes."
The S&P/Case-Shiller index, which Tuesday posted a 12.7% decline for February, is skewed for two reasons of its own -- it tracks just 20 major markets, many among the hardest hit, and its "repeat sales" survey by design pulls in individual homes both bought and sold in the last few years. Many of those are now being dumped by distressed homeowners and investors who bought at peak market prices and face higher mortgage-rate adjustments.
A widespread problem
The misleading home-value figures are just one example of recently sketchy readings of the U.S. economy. U.S. consumer-confidence readings, for instance, have been wildly divergent.
The Conference Board's closely tracked index Tuesday showed confidence falling in April to its lowest since the eve of the U.S. invasion of Iraq in March 2003. A University of Michigan survey incorporated in the U.S. Index of Leading Economic Indicators last week rang in at its lowest level since November 1982 --when the country was suffering through 10.8% unemployment and the worst recession since the Great Depression.
That 26-year-low confidence mark grabbed headlines nationwide while the Conference Board number that many economists find equally reliable drew far less media attention. Not one journalist who contacted Conference Board Communications Director Frank Tortorici's office Tuesday inquired why there was such an astounding discrepancy, he said.
NAR's Yun said the financial media is seizing on gloomy numbers and providing little analysis or historical perspective. He freely admits NAR's readings aren't accurately reflecting what's happening with home values for the overwhelming majority of Americans.
"Like any economic measure, it can be imprecise, and it is especially so now," Yun said.
As reported Tuesday, the S&P/Case-Shiller Home Price Index's12.7% decline in February was the largest drop since its creation in 2001. Despite that index's limited seven-year history, the Associated Press reported that home prices "plunged by a record" percentage and "at their fastest rate ever."
The glaring discrepancy in this case is that 17 of the 20 metro areas posted record annual declines, and yet 78% of the 330 metropolitan regions that NAR tracks reported price increases in the latest period -- and that despite the acknowledged downward bias in current price readings.
S&P Index Committee Chairman David Blitzer acknowledged his organization's overall and metro-market readings paint an incomplete picture. For that reason, he said, the report now charts price changes in 17 of the markets at three specific levels - low-, mid- and high-priced homes -- to provide a clearer assessment.
In the high-priced San Francisco area in February, for example, homes priced below $512,000 fell 32% in value from a year ago, while homes priced from $512,000 to $750,000 fell 21% in value and those over $750,000 fell 6%.
"The homes that had the biggest run-up and biggest run-down more often than not are the least-expensive homes," said Blitzer, S&P's managing director of portfolio services.
Yun said the S&P/Case-Shiller Index is flawed because "if you focus on down markets you're going to get a downward price. We are disappointed that its very limited market coverage gets such attention."
Conversely, Blitzer said the NAR figures are faulty because "it's well understood that a median is subject to sharp swings in the sample. The only plus is that it's easy to compile using inexpensive computing resources. If I had 88 years of data, I wouldn't want to change (methodologies) either."
In both cases, pockets of severe price declines in local markets are skewing figures, Yun said. If homeowners want to determine their property's value, it's never been more critical to take the measure of recent sales by home-price level in their town or city neighborhood.
"Just like saying the average nationwide temperature today is 57 degrees doesn't tell you anything, the same is true for real estate prices," Yun said. "The only way to tell what your own home is really worth is to look at local-market conditions, do Internet research and utilize professionals (such as licensed appraisers) to help determine the value of your home."
Chris Pummer <mailto:email@example.com> is a former senior editor for MarketWatch and Bloomberg News and a reporter for such papers as the Los Angeles Times and San Jose Mercury News.
[submitted by Cyd Crampton]