Monday, June 02, 2008

Matt Carter has a good piece on House Price Indexes on Inman News

He notes:

1) Case-Shiller and OFHEO look at repeat purchases and exclude new home purchases, but OFHEO also throws in appraisals that are generated when people refinance their homes. As we have all become very cognizant of lately, what a house will appraise for and what a house will actually sell for on the market can be very different things.

2) OFHEO doesn't consider transactions involving loans that are too big or too risky to be guaranteed by Fannie and Freddie, and acknowledges that homes with these mortgages on the upper and lower price ranges are seeing bigger price declines than the homes it tracks.

3) NAR looks sales of existing homes listed by MLSs, and reports median home prices, which reduces the impact of price volatility in upper price ranges.

The result is that the Case-Shiller index can show more extreme swings in price -- both up and down -- than NAR or OFHEO's numbers.

There are actually three Case-Shiller indexes -- monthly 10- and 20-city surveys, and a quarterly report that looks at all nine U.S. Census regions. The monthly survey is the one people tend to get the most worked up about, because it looks at 20 metropolitan statistical areas that include hard-hit areas like Detroit, Las Vegas, L.A., Miami, Phoenix, San Diego and Washintgton D.C. -- all of which have experienced double-digit price declines in the last year.

To the extent that the monthly Case-Shiller index can mistakenly be interpreted -- by a cursory reading of a headline, perhaps -- as representing the state of the nation's housing markets, that's a problem. And Ross is not alone in pointing out that Case-Shiller can also miss trends in micro-markets, like Manhattan, because it doesn't track sales of condos and co-ops.

He also points out that Lawrence Yun, Chief Economist of NAR,

...goes after Robert Shiller, the Yale economist who helped develop the Case-Shiller index, claiming that as a co-founder of MacroMarkets LLC, he profits from the trade of housing and futures options on the Chicago Mercantile Exchange and has a financial incentive to "scare" the market."

"The more hedging of bets that occur, the more profits go into Dr. Shiller’s bank account," Yun claims. "And more hedging of the bets will take place if people believe there will be a crash in housing values."

This is a disgraceful smear. I don't always agree with Shiller (I thought and still think he called the housing bubble prematurely), but he is a great and scrupulous scholar. His work has been cited on google scholar more than 10,000 times; Lawrence Yun has been cited twice. Despite this, I have seen Shiller express becoming modesty about his attempts to get a futures market going--something that would very much benefit consumers, were it to work, and that could reduce volatility. I am actually skeptical about whether futures markets can work in the housing market, and people actually hedge themselves pretty well by using mortgages (which are essentially a short position). But I very much admire Shiller's efforts to get one going--it is rare that such a first rate academic tries to create something so useful. As for Lawrence Yun's potential conflict of interest, let's not go there. But he owes Case and Shiller both apologies.

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