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| Beware of Indices That Track Former Bubble Markets |
| Written by Jonathan Smoke | |
| 12.31.2007 | |
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Discuss this article on the forums. (0 posts) The news and blogs are full of comments about the horrible year that housing had in 2007, and most experts expect 2008 to be as bad if not worse. I think 2008 won’t be good in terms of any significant rebound, but I don’  t think prices and sales will be worse in non-bubble markets, which are the majority of markets in the U.S.For those who would lead us all to believe that we’ll continue to have massive home price declines across most markets, the S&P/Case-Shiller index is the preferred weapon of choice. What cities are in the S&P/Case-Shiller 10-city composite? Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco, and Washington, DC. This is hardly a set of cities that look like the rest of the U.S. from a housing perspective. As I shared last week, we created a simple model to identify which markets had some level of speculation driving up prices beyond where they otherwise would have been. We found 156 MSAs that appeared to have had some level of a bubble activity. Of the 10-city composite cities, only Boston and Denver didn’t land in our list. The S&P/Case-Shiller 20-city composite adds Atlanta, Charlotte, Cleveland, Dallas, Detroit, Minneapolis, Phoenix, Portland, Seattle, and Tampa. This group does a better job of including fewer former bubble markets thanks to Atlanta, Charlotte, Cleveland, Dallas, Detroit, and Minneapolis. According to our analysis, 43% of all MSAs, or clearly less than half, had home prices rise beyond what the fundamentals would have indicated. The S&P/Case-Shiller 20-city composite manages to have 60% of its markets include former bubbles. The 10-city composite includes an astounding 80%. So if you want to track what’s going on with home prices in formal bubble markets, the S&P/Case-Shiller index is all that you need. But if you happen to be interested in one of the 205 markets that weren’t bubbles, you need to look at other price indices. Former extreme bubble markets still have more room to fall in their home prices as evidenced by published research from firms like Global Insight / National City Corporation. Other markets are not in need of further price corrections. So indeed, 2008 looks like a mixed bag for home prices, but it all depends on which markets you track. 
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No. 1 : NOT ACCURATE As an Appraiser the market indexes such as the Schiller Index is dealing with the pricing on a wide scale rather than on a neighborhood scale. There are areas in the Phoenix Market which I have my practice that have gone down, while there are areas which are stable and some have even begun to increase in value. Also the indexes which are recommended are dealining with values as of 3 months ago and in a highly volitile market 3 months is where I am cutting off my comps due to the rapid changes which are occuring. Instead of the indexes which are inaccurate at best, many appraisers have begun looking at the absorption rate for the neighborhood as all real estate is local. The absorption rate linked to the median value of housing in the area show on a per square foot basis and on a range basis of the housing value and martket trend for the area. So there is a solution but then the mathmaticians and computer modeling experts have a product to sell and have gotten the the backing of the street to support it. More money wasted by lenders, more greed, and more reliance on statistical modeling that doesn't work. Like the use of FICO scoring to determine the capability of the borrower to repay. Another fiasco. |
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