The Case Against Case-Shiller (and other lagging housing market indicators)
As I opened the morning paper the other day, I saw a story splashed across the business section suggesting that we might be heading into a “double-dip” housing recession based on the latest S&P Case-Shiller index report. What was ironic was that over the past week, I had just finished meeting with my office managers throughout Northern California – most of whom were reporting that their local markets were revving up with great activity, and some markets with a real sense of urgency. What gives?
The paradox made me think that a lot of people – consumers and real estate reporters alike – may not realize that such monthly reports as the Case-Shiller index and even the very popular DataQuick Bay Area market report are really lagging indicators of the housing market. They are in effect old news by the time they are released. These reports are based on closed sales the previous month that actually began two or three months before in many cases.
Take the most recent Case-Shiller report: This study came from closed home sales – not in March or even February – but January. Those same transactions began when consumers agreed to buy the home perhaps as early as the fall. These kinds of reports are a very old “snapshot” of the housing market by the time they get to the news media. This would be like someone opening up their sports section last October and instead of seeing the Giants in the World Series, found our local heroes 10 games out of first because the papers was still reporting the July standings.
So what’s a better way to take the current temperature of the market? New sales or pending sales are a much more accurate assessment of what’s happening now because they are a forward-looking indicator. These are sales that have just occurred, but haven’t gone through the 30 days or 60 days necessary to complete escrow. New pending sales offer the best barometer of what's happening at the moment regarding buyer confidence in the housing market; the transactions that will be reported by Case-Shiller and DataQuick a month or two from now.
And what’s encouraging to me is that all across the Bay Area, pending sales in March are outpacing the same total last year – in some cases by as much as 200% over March 2010. Our Greenbrae office is a good example. The housing market in March was “on fire” in Central Marin, according to our Greenbrae manager. The office was planning for 26 new sales, but exceeded that with close to 60 sales. He said the office has not had a month like this since the boom in ’07 and even then it did not have such a high number of transactions. That story is echoed by many other offices, from Marin down through the Peninsula and across the Bay.
This is not to say that every community and every neighborhood in the Bay Area is seeing a revival in new sales. There are still slow areas that are still challenged, depending on the price point. And even within some cities, certain parts of the market are doing well while others might be soft. And the overall market will continue to be challenged by shadow inventory of distressed properties coming on the market.
But my point is that if you read the lagging indicators like the Case-Shiller report you’d think the market is dropping off the cliff. Far from it. We are definitely seeing a tremendous improvement in many parts of the Bay Area, and we’re not alone.
According to the National Association of Realtors, the pending home sales index for properties nationwide, a forward-looking indicator, rose 2.1 percent to 90.8, based on contracts signed in February, from 88.9 in January. Lawrence Yun, NAR’s chief economist, said, “Pending home sales have trended up very nicely since bottoming out last June, even with periodic monthly declines. Contract activity is now 20 percent above the low point immediately following expiration of the home buyer tax credit.”
The outlook wasn’t even across all regions, however. The PHSI in the Northeast fell 10.9 percent to 65.5 in February. In the Midwest the index rose 4.0 percent in February to 81.1. Pending home sales in the South increased 2.7 percent to an index of 100.3. While in the West the index rose 7.0 percent to 105.6 and is now 0.6 percent higher than February 2010.
“We may not see notable gains in existing-home sales in the near term, but they’re expected to rise 5 to 10 percent this year with the economic recovery, job creation and excellent affordability conditions providing confidence to buyers who’ve been on the sidelines,” Yun said.
One other thought when it comes to housing numbers: It’s important to take the lower median or average sale prices in monthly reports this time of year with a grain of salt.
In many markets throughout Northern California, REOs and short sales can make up as much as 20% to 30% of the entry level sales. While typical homeowners might take a break from the holidays and list (or re-list) their property in January or February, banks don’t take any breaks in November and December. These listings stay on right through the holidays. So a greater percentage of available listings that sell are "distressed" properties at lower price points, bringing the median and average sales prices down for several months in the New Year.
Information courtesy of Rick Turley, President, Coldwell Banker Northern California
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