Why Case Shiller Numbers Can Be Skewed

By
Services for Real Estate Pros with Zillow

Today Inman reported the latest Case Shiller numbers came out:

"A monthly home-price index that tracks price changes in 20 U.S. metro areas dropped 18 percent in October compared to the same month last year...The year-over-year decline was the largest on record for the Standard & Poor's/Case-Shiller 20-metro area price index, which dates back over two decades..."

I wanted to bring some attention to the way these numbers are calculated, as there are some strong biases which could potentially skew these numbers. 

The Case Shiller index was invented in the 60's using a methodology that weighted repeat sales data.  Before this people simply looked at price changes between repeat sales of a particular home, verses looking at median sales price data for a certain time period, to figure appreciation/depreciation rates.

However, when you look at the median sales prices, the number is going to be heavily influenced by the type of homes that are selling at the given time.  For example, in my neighborhood right now one and two bedroom condos are still moving at a decent clip.  However more expensive, single family homes are taking much longer to sell. So if I were to look at median sales for my neighborhood, given that more of these less expensive houses will sell this year than last year, it will make the median sales price look lower.  The Index would be biased by the sheer fact that more, smaller condos are selling right now.  If housing prices would have remained constant, but more cheaper houses are moving, it would make an area look like it is depreciating, when in fact this may not be true. 

Further, the Case Shiller Index looks only at homes that have been sold at least twice.  So if you live in an area that has a high density of new construction, much of the sold inventory will not be taken into account to the Index, and thus could skew your numbers as well. 

The final point to keep in mind about the Case Shiller number is that it reports on a monthly basis with a two month data lag.  We all know what a wild ride real estate has been these past few years and how quickly things can change.  A three month data lag could potentially mean a lot in dollars lost or gained for a local market. 

At the end of the day, the Index is just an index.  It, like many other stats out there, is nice to help you get an idea of general market conditions.  However, it is important to consult with a professional, who has feet on the street, to get the real picture. 

 

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Re-Blogged 2 times:

Re-Blogged By Re-Blogged At
  1. Jeff R. Geoghan 12/31/2008 12:53 AM
  2. Maureen McCabe 12/31/2008 02:20 AM
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Rainmaker
1,477,228
Maureen McCabe
HER Realtors - Columbus, OH
Columbus Ohio Real Estate

That is interesting.  I was looking at it yesterday not because of the Inman article but because of something I saw about it on Twitter.  Case Schiller Index does not include Columbus, so I only pay so much attention to it but I started looking at it because of a comment on Twitter that the  'less desirable cities in the midwest had the biggest drops' that is a paraphrased tweet  from someone not in the RE industry... Or something like that.  Of course it is not true and he retweeted that he was mistaken about which cities had the biggest price changes.

Dec 31, 2008 01:01 AM #1
Rainmaker
182,040
Sara Bonert
Zillow - Atlanta, GA
Real Estate Internet Marketing

Maureen - Yeah, Case Shiller reports on the 20 higher level metropolitan areas, although they use data from about 100 metropolitan areas.  But still, these numbers may be too high level to get an accurate view of what is going on in a particular market that isn't in the report.  Closest to you would be Cleveland, which they report as having a 6.2% YOY decline.  But I am sure the Cleveland market is very differnt than the Columbus market. 

Dec 31, 2008 01:07 AM #2
Rainmaker
1,477,228
Maureen McCabe
HER Realtors - Columbus, OH
Columbus Ohio Real Estate

I was trying to find info on the other 80 metro areas yesterday but gave up.  - 6.2% for Cleveland I thought was great, better than Chicago and Minneapolis for the time period but it probably doesn't provide any indication about Columbus, we are very different from Cleveland. 

 

 

Dec 31, 2008 01:31 AM #3
Rainer
126,384
Tony Grego, 317-663-4173 #1 Trade Association for Alternative Inv
REISA - 317-663-4173 - Indianapolis, IN

Thanks for the info. This like anything else can be interpeted many ways. We all just have to work together to make things better.

Happy New Year

Tony

Dec 31, 2008 01:35 AM #4
Rainer
11,519
Drew Meyers
Geek Estate - Seattle, WA
Drew Meyers
Rainer
2,181
Doug Wolfe
Long and Foster Real Estate, Inc. Phoenix, MD - Phoenix, MD

What are some of the other market indices an agent can use to incorporate into a market analysis.  I spend a lot of time studying sales data from the MLS, Census Bureau, and anything else I can get my hands on to back up my estimate of market value.  Zillow and other similar sites sometimes provide consistent estimates, but in other cases vary widely.  So what I try to find is consistency using several sources of information.

Then a few agents with a lot of experience show up, spend fifteen minutes looking around, and their off the cuff estimate ultimately turns out to be pretty much on target when the property sells.

It makes me crazy. Any ideas? Any other numbers wonks out there?

Jan 14, 2009 04:19 AM #6
Anonymous
shocked

Do you know what repeat sales data is?  You acknowledge that that is what the index uses, and then you say that it uses median home price.  Clearly median home price is skewed, but that's exactly what the CS index avoids.

 

And with new construction, that is taken into account by the index, because the repeat home sales will be affected by this supply.  I assume we all live in a fairly competitive real estate market?  So the new homes will be reflected in lower sale prices of all homes.

 

No index is perfect, but please don't confuse people.

Feb 24, 2009 01:47 PM #7
Anonymous
shocked again

Sorry I forgot to address your final point.  yes there is a time lag, but it is not a wild ride in the sense that there's been ups and downs.  It's just been down.  so if anything, the index reports a higher and more optimistic price than what is currently happening.

Feb 24, 2009 01:49 PM #8
Rainmaker
241,465
Barb Fischer
Big Block Realty - La Mesa, CA
San Diego and La Mesa Real Estate

Thanks for the info, Sara. I think consumers are overwhelmed by all the different stats they hear and read.

Mar 24, 2010 03:49 PM #9
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Sara Bonert

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