Los Altos Real Estate Blog

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Why is the S&P/Case-Shiller index wrong?

You see those numbers published for your area and know they're off. Like clockwork, the S&P/Case-Shiller index of 20 metropolitan regions publishes their results, mostly declines, and the media eats it up.  What's wrong is that when you look at actual sales performance in those same regions, the figures published by S&P/Case-Shiller are wrong.  Very wrong.  Worse yet, they're misleading.  Let's take a look at why.

Incomplete metropolitan regions:  In California, the San Francisco Bay Area metro region is defined by San Francisco and immediately surrounding areas, including some troubled markets in the East Bay.  What's missing, and typically included by local market analysis, is the lower Peninsula and all of Silicon Valley.  That means the analysis they use to talk about the region as a whole, doesn't include any of the area's strong markets and over 1 milion residents.  Nationally recognized hot spots like Palo Alto are completely excluded.  Look at other regions they use across the country and you'll see similar exclusions.

Paired sales analysis flaws:  The core of their analysis is "paired sales".  That's when they compare the sale of a home in the past with the sale of the exact same home now.  That method misses micro-market dynamics that impact broader sales averages.

  • Compare a home that sold in the past and then sold again recently
  • Compare the variance of that sale with the average and median sales in the same area
  • You'll see gaps where the sales pairs only account for certain price ranges, home sizes, or neighborhoods

I had an argument with someone two years ago (2010) about paired sales in Palo Alto.  They claimed paired sales showed a decline, which was true.  However, when looking at average and median sales it showed increases that year as well as 2011.  The broader markets improve while the pairs show a different picture.  I'll take the averages any day - much more accurate.

Reports are too late:  There are indvidual metro areas and the 20-city composite is calculated monthly but accurate details are reported 2 months later.  Telling a buyer in April that the market is slow, based on February data, is part of what has held back recovery because the reports cast doubt on a market that, at the moment, may be perfectly fine.

The market reports of a local agent will provide a more accurate picture of the broader trend than Case-Shiller.  While they claim that the index accounts for home quality and other factors (such as reducing relevance based on time between sales), it appears that S&P/Case-Shiller shows a very skewed impression of the market.

What do you need to do to counter these errors?  Split single-family homes from condos/townhouses.  They're two completely different markets.  Educate consumers with...

  • Publish monthly stats and show averages and medians, not just one or the other.
  • Show the 3-month moving trend and year-over-year monthly comparison.
  • Break out towns and neighborhoods, if possible.  Micro-markets are key.

 

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 Bryan Robertson, CEO | T: 650.799.9951 | Email: bryan@catarra-re.com | Website: http://www.BryanRobertsonHomes.com |CA BRE# 01191946 | Catarra Real Estate, Inc  | 171 Main St #220 | Los Altos, CA 94022

 

 

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Comment balloon 5 commentsBryan Robertson • February 01 2012 10:03AM

Comments

Bryan -- well said.  Nationwide or metropolitan real estate reports/statistics may be of interest to some but my clients are really interested in what is going on in their neighborhood.   It isn't just local - real estate today is all about the micro-market.  

Posted by Michael Jacobs, Los Angeles Pasadena Area Real Estate 818.516.4393 (Coldwell Banker Residential Brokerage) almost 7 years ago

The only way to combat incorrect and misleading information is to publish your own.  Your three points at the end of the post are key in getting to the actual stats and what is relevant for your marketplace.

Posted by Margaret Goss, Chicago's North Shore & Winnetka Real Estate (Baird & Warner Real Estate) almost 7 years ago

Hi Bryan - Great analysis of what's wrong with the big picture reports. It's interesting that there is really nothing standing in the way of reporting on the market in an informative and accurate way? And wouldn't it be cool if NAR ran a campaign saying something like "Real estate is local - talk to a local Realtor to find out what's really going on where you live?" instead of wasting our money on the garbage they're running now informing our customer base that they can't afford to buy a home?

Posted by Dick Greenberg, Northern Colorado Residential Real Estate (New Paradigm Partners LLC) almost 7 years ago

Somebody just commented on the Case Shiller Index in a post yesterday.  And, I commented that I never trust them anymore, and that real estate is local.  When will people get it?

Posted by Don Sabinske, Sabinske & Associates Inc. (Don Sabinske, Sabinske & Associates Inc.) almost 7 years ago
pHi Joyce,/ppI actually roeamd over to your blog via a twitter post from OC Restaurant Week and read your bio./ppI found it interesting that you are an RN and now work in real estate. My educational background is in Computer Programming. I worked at a sub-prime mortgage company for 3 years after college (please don't blame me, I was only in the Loan Servicing Department / IT guy). While I was there I got really interested in the business and had always wanted to get into it, but then the market crashed and the company closed down./ppAfter that job I got my current job as a Database Programmer. Although I like my work I find myself with plenty of free time after 5 and on the weekedns and not as much income as I would like./ppWhat are your opinions on part time real estate careers? I know when I was looking for a home, I always made appointments after the usual 8 hour work day. It this something I can do after 5pm? I don't know the difference between an agent, broker, etc. Where should I start in terms of training and getting license, etc./ppYour guidance would be greatly appreciated./ppMike./p
Posted by Atidnil almost 7 years ago

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