Shiller's Real Estate market index has it all wrong, here's why

Real Estate Agent with Horizen Partners

 The following was written by David Michonski, CEO of Coldwell Banker Previews.  For anyone who is frustrated with the negative coverage of the housing market, this is a *MUST READ* 

Please distribute as widely as possible


"Knowing what we know about real estate."
By David M. Michonski

            How we know what we know is an arcane epistemological question. Now it may be a matter of national economic security.  Our entire financial system's survival may now depend on how we "know" what we "know" about real estate markets. 

            What we "know" is that day after day the headlines tell us real estate markets in America are falling out of bed.  Because homes  are  presumably falling  in value, the mortgage markets have seized up and institutions are reluctant to lend against an asset declining in value.

            The financial market's reluctance to lend against this declining asset and the public's reluctance to buy it,  fuels a self-fulfilling cycle of falling prices that today threatens the  very Wall Street firms who securitized and internationalized the once sleepy, local mortgage market.  The failure of one or more of those firms could have a domino effect on our entire financial infrastructure and cause further panic in financial and real estate markets of epic proportions. 

            But what if the headlines are not quite accurate?  What if what we know about the real estate markets is distorted and the distortions are being sensationalized?

            Given the importance of the outcome, now might be a good time to ask how we know what we know before fiction becomes reality.

            What we know today is largely courtesy of  the S &P Case Shiller Index.  This index has replaced two older indexes on the front page of American newspapers. One was the National Association of Realtors' monthly  price index and the other is the OFHEO index (Office of Federal Housing Economic Oversight). The latter two use rather different methodologies but over the years have reached  remarkably similar  conclusions about prices of homes in America. When different methodologies yield similar results, you get a good handle on reality.

            Today we don't hear much about either index. Instead, the Case Shiller index is everywhere with its ominous message. The index talks about a 15% price decline in Miami and 4.8% for the year in New York.  Bloomberg quotes Shiller: "We are in an historic housing bust right now."

    Two weekends ago I opened my AOL account and saw a bold headline that home prices in 20 markets were falling rapidly with quotes from Shiller that prices nationally finished down 8.9%.  "Wherever you look things look bleak" Shiller said.

            The Wall Street Journal runs a headline "Home Prices Decline at Record Rates" quoting Shiller yet again.

            Is Shiller right?  The importance of the question forces us to look at the market through the other available lenses,  NAR and OFHEO.

             OFHEO  has been keeping a national index for years and publishes monthly a one inch thick book on housing prices. It says that in 2007 the average price in America was down .3% . Yes, that is three tenths of one percent, not Shiller's 8.9%. Compared to OFHEO  Shiller's index overstates the decline by 29 times or  2900%, not a small amount.

            The  National Association of Realtors index showed a median 1.4% decline nationally after 64 years of uninterrupted gains.  Compared to NAR's 1.4% median price decline, Shiller overstates the "freefall" by 6.3 times or over 600%.  

When I pondered  the 2007 OFHEO and NAR numbers a blasphemous thought came to mind, one contrary to today's media dogma:  the numbers showed not weakness in the real estate markets, but rather resiliency. Just my musing. Interpret as you will.

Recently, another report came out that was  greatly at odds with  Shiller's shrillness. It came from the 2007 results for  Realogy,  the largest real estate brokerage company in the world. It owns the Century 21, Coldwell Banker, Coldwell Banker Commercial, Sotheby's, ERA and Better Homes and Gardens brands, among others. They have over 300,000 agents under their franchised brands, or about one-fourth of the members of the National Association of Realtors. So these are real people doing real business everyday in the real marketplace, not in a Yale think tank. 

Realogy reported that their average price in 2007 was down 1%, right in line with the NAR and OFHEO data.  Again this is from a real real estate firm operating in the real world daily. This makes three out of four indexes point in one way and Shiller alone points to much more calamitous and foreboding results. Is there a reason why?

            Some think it may have to do with methodology. Shiller and OFHEO's are both repeat sales indexes whereas NAR's data and that of Realogy take all sales volume and divide it by unit sales to get an average price and then figure out the median. Still, even using different methodologies,  three out of four give one clear answer, that prices have fallen about 1%,  while Shiller points to a 9 times greater fall.

            Some additional notes. Shiller issues national press releases monthly but his index  is anything but national unlike OFHEO, NAR and Realogy's data. He covers completely only 8 states out of 50 and in part another 13. He has no data from 29 states.

The eight states completely covered  are  among the weakest in the nation. Coincidence?  Even the Wall Street Journal said several weeks ago that Shiller's index may be negatively biased.  

            Shiller claims to cover 20 markets (some are in the same states and hence 20 markets but only 8 states are  fully covered) .  He labels those markets with the names of cities, not  states. Hence New York, Miami, Seattle, etc.  This gives the impression that the markets he is reporting on are in fact cities (what else would one think?) 

            In fact,  Shiller does not report on cities but on MSA's, short for Metropolitan Statistical Areas.   This leads to some remarkable distortions. For instance,  Shiller claims  New York prices fell 5.6% in 2007 versus an  index created by Manhattan based Miller Samuel that says the average Manhattan price rose 17.6%.  The two are reporting apples and oranges but which gives the more correct impression?

Miller Samuel  tracks coop and condo sales in Manhattan and Manhattan is what most people think of when they think of "New York."  Shiller's index, expressly excludes condominiums and coops which account for 1/3 of  New York City sales and 99% of  Manhattan sales. Thus,  Shiller gives the impression of reporting that prices have dropped 5.6% in  a place where he does not cover 99% of the sales and where prices have not dropped but risen, substantially.

            Even more perversely, Schiller's MSA for "New York" tracks sales in Putnam County, two hours north , and single family home sales in Bergen County, New Jersey and home prices out on Long Island. Trailer park sales in Putnam County are in his "New York" index.  

            Criticisms of Shiller's  inaccuracies are growing.  RealTrends, a national industry monthly, ran its January headline "Case Shiller Index Exposed" and ran a synopsis of a paper done by Andre Leventis of OFHEO in which it chronicles the "flaws in Case-Shiller that are traceable and have a huge impact on the variance between their reports and those of so many other reports, including NAR's and our own."

            Lawrence Yun of  the National Associations of Realtors (who was named by USA Today as one of the top ten economic forecasters for his accuracy) has ratcheted up his criticism of Shiller. Yun calls Shiller's index a "total distortion of market conditions based upon a small selection of falling local metro coverage."

            OFHEO has also chimed in by indicating that 70% of markets nationwide are not falling but actually rising, a far cry from what Shiller is peddling to the press.

            But something more sinister is coming to the fore which a responsible press cannot ignore.  Shiller shrillness may be due to self interest and private gain. 

The gospel according to Shiller is that national homes prices are in a freefall of epic proportions and that 20% to 30% price drops are in order. How could that help Shiller?  

            Yun suggests that  Shiller profits from creating fear. He creates fear so that people will want to hedge themselves against price declines by buying insurance against a free fall in prices. Where is such insurance available?  Answer: on the S & P Case Shiller index traded on the Chicago Mercantile Exchange. According to Yun,  Shiller has a "side business in Chicago. His index is used at the Chicago Mercantile Exchange for hedging housing futures values. The more hedging of bets that occur, the more profits go into Dr. Shiller's bank account. And more hedging of the bets will take place if people believe there will be a crash in housing values. So naturally he has a financial incentive to ‘scare' the market."

            I have no direct knowledge that he does so for profit although anecdotally I have been told this is true. I suggest it is time for the media to find out.

If  the media does not look more deeply into the methodology being used today, Shiller may indeed scare America into depression or a Depression.

While asking for disclosure of Shiller's self interest, allow me to disclose mine. I  am indeed a REALTOR and make a better living when real estate markets are healthy than when they are sick. As a REALTOR I subscribe to something made clear in our Code of Ethics: we believe that upon "widely allocated ownership [of real estate] depend the survival and growth of free institutions and of our civilization." No small thing. Our Code says this imposes on us "obligations beyond those of ordinary commerce." 

Today the commerce of real estate is being distorted,  possibly for private gain. Widely allocated ownership and possibly the survival and growth of our free institutions is at stake. With it is something else at stake. It is called the American Dream.

While REALTORS  work to make a living, most find a different satisfaction from the business. Ostensibly the business seems to be about selling homes, but really it is about selling the American Dream.  We take some satisfaction out of trying to make sure as many people as possible can have that dream.  We even think that promoting home ownership fosters better citizenship, because citizens who own a piece of America will want to take greater care of it.

So we feel there is a lot at stake here, both for REALTORS like me, as well as the rest of America.  Is it not time to start some background checks?

David M. Michonski is Chairman and CEO of Coldwell Banker Hunt Kennedy in New York City

Contact: 212-326-0301
Cell: 203-570-5477

Comments (11)

Cameron Keegan
RE/MAX Moves - Greenville, SC
Cameron Keegan

Great stuff, but unfortunately, I'm sure this won't make the news.  The unfortunate thing is the fact that even our local news, in a good market, can't help but talk about national numbers.  I find this to be irresponsible on their part, so I actually created a list of e-mail addresses for every anchor at every station in our market.  When one of them decides to read something about national numbers, without stating locals facts, they ALL get an e-mail.

Mar 28, 2008 07:04 AM
Greg Steffens
Mountain Country Realty - Lake Arrowhead, CA

Hey there - welcome to Active Rain and congrats on your first post.  Keep it up and you'll soon see the benefits (as I have). 

Mar 28, 2008 07:23 AM
Kirk Westervelt
Van West Realty - Greenville, SC Realtor -Short Sale Expert! - Greenville, SC
Kirk Westervelt, Broker In Charge, Van West Realty - CDPE - Short Sale Agent - Home for Sale - Greenville, Simpsonvil...

e·pis·te·mol·o·gy      [i-pis-tuh-mol-uh-jee] Pronunciation Key - Show IPA Pronunciation –noun a branch of philosophy that investigates the origin, nature, methods, and limits of human knowledge.


of or relating to epistemology; "epistemic modal" [syn: epistemic


(For anyone who slowed down in the first paragraph!)

Great blog!

Welcome to Active Rain! 

Mar 28, 2008 07:30 AM
Benjamin Clark
Homebuyer Representation, Inc. - Salt Lake City, UT
Buyer's Agent - Certified Negotiation Expert

Welcome to Active Rain! For some tips on how to get started here, check out my blog entry at ActiveRain Fast-Start Tips for Quick and Easy Points

Happy blogging and good luck!

Mar 28, 2008 05:13 PM

Philip - Welcome to the Rain, make sure that you browse the site and become familiar with everything this site has to offer.  The more you browse the more you will learn.  I have found this site to be really helpful to me.  If you have any questions, please don't hesitate to email me, I will do whatever I can to help.

Mar 28, 2008 11:38 PM
Real Analytics

What a ridiculous post. Gee, could you be any more BIASED? What a j**ka** article.

In case you don't know...home prices across the nation - excepta very few cities are and have DECLINED.

Do you live in the land of fluffy marshmellos? Dimwit. Have you seen radar logics report?

Home prices fell in 22 U.S. metropolitan areas in February, led by Sacramento and Las Vegas, as record foreclosures deepened the housing slump. The price per square foot in Sacramento, California's capital, dropped 29.8 percent to $161 from a year earlier, according to a report released today by New York-based Radar Logic Inc., a real estate data company. Las Vegas declined 26.2 percent to $133 a square foot.

New foreclosures hit an all-time high at the end of 2007. There are 650 thousand homes in FORECLOSURE dumba**. Seriously, are you mentally challenged in anyway? Or are you just a dopy typical realtor who lies and deceives people into thinking everything is great. Realtors are sickening, pieces of garbage who are nothing more than carpet salesmen hocking lies. Your profession is viewed with disdain and contempt and rightly so.

Now, on to the Case-Shiller Report. While it may have some slight faults, for the most part it is very reliable.

There are a lot of points in the Case-Schiller index that are important. First, the Case-Schiller index excludes new construction. Second, the Case-Schiller index excludes or assigns a low weight to houses in the data sample when the changes in sale price for a house over time are dramatically out of line with the surrounding area. Third, data are only included when there are two data point for sales price. Simple averages of sale prices in a region will tend to show higher returns from real estate (which are not in fact present) if new construction tends to be larger or simply more expensive than older construction-and this is an important trend. The average square footage of homes in the U.S. has increased dramatically over the past forty years. The same issue arises for re-modeling or additions. If you just look at average sales price, you will get an apparent rate of return that is too high because it does not reflect all the money that people in my neighborhood have put into improvements. The Case-Schiller index will correct out a lot of this ‘false return' effect.

 All in all, your assessment is completely way off and shows ignorance and incompetence on how armchair analysts try to "Spin" data and facts. For once stop being a lousy salesman take your head out of your a** and try be logical.

May 04, 2008 05:10 AM

What a great read! Case/Shiller indices really are negatively biased and you make a great argument to support that viewpoint. THANKS!


P.S. What's up with "Real Analytics"? Bad spelling, bad attitude - sounds like a CL anit-housing blogger! LOL

Jul 07, 2008 03:09 AM
spin meister

If you've read this article, just understand that these people's personal survival is at stake. This means they will support whatever warped reality they must in order to try and convince the sheeple that things are not as bad as they seem.

Do you really believe that they want nothing more than to "promote home ownership to foster better citizenship, because citizens who own a piece of America will want to take greater care of it"?

This has been their story ALL THE WAY DOWN.

Bookmark this page and check it in 2009 (if it hasn't been removed) and then we'll compare notes.

No_spin: You Real-tards stick together. Click your heels some more...theres no place like 2005....there's no place like 2005.

Aug 06, 2008 04:39 AM
spin meister

just some fodder supporting reality. A good take on the NAR's position ALL THE WAY DOWN. It comes down to the individuals responsibility to do their own homework and to take what EVERYONE says into concideration when making a decision with housing:

Aug 06, 2008 04:54 AM
Chris Martin
Holly Springs, NC

Aren't statistics great? Pick the collection or sets of data that meet what you are looking for and... Boom! Proof that your point is right! You say "Is Shiller right?  The importance of the question forces us to look at the market through the other available lenses,  NAR and OFHEO"

So you say Case/Schiller is bad. OFHEO is good. I say you should Google "Office of Federal Housing Enterprise Oversight methodology" then click the first link. It is OFHEO House Price Indexes : HPI Technical Description ( does it say?

"1. Introduction
The Office of Federal Housing Enterprise Oversight (OFHEO) estimates and publishes quarterly house price indexes for single-family detached properties using data on conventional conforming mortgage transactions obtained from the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae).1 The house price indexes published by OFHEO -- hereafter referred to collectively or individually as the "HPI" -- are based on a modified version of the weighted-repeat sales (WRS) methodology proposed by Case and Shiller (1989). This paper provides background and a technical description of the data and statistical methods used to estimate the HPI.

I think it is best to look at data first hand, especially in your target local market. I get the facts first, then draw conclusions (see also ... a Reality check on 2008 default filings for Wake county, NC

Jan 03, 2009 02:26 PM
Howard Goff
Keller Williams Realty - Vancouver, WA

Interesting points about the limits of Case Shiller's Index.

From what I am seeing when I do Comparative Value Analysis of properties purchased in the past 5 years there has definitely been a decline in prices in our area (Clark County, WA). From 2006 it appears that there has been at least a 15% drop in prices of the same homes. In high end properties that drop has been over double that.

If the Realtor indes is indicating otherwise I have to suspect that it is biased or has its own statistical limitations.

Dec 20, 2009 06:20 AM