This post first appeared in the April edition of: Cirios Trends: In Search of Real Estate Opportunities.

For 12 months now, the Case Shiller Home Price Index - the most widely watched home price indicator - has been hinting that the housing market has at the very least stopped getting worse. In February’s Cirios Trends, we examined housing’s relationship to the stock market and how last April’s nadir coincided with lows in equities. (For more on home prices and stocks, flip to the charts in the back of this month’s issue for some interesting graphical analysis.)

But back to the data. This month we also received two more signs that the economy, at least on paper, is doing a bit better. First, last week’s employment report showed a meaningful jump in non-farm payrolls for the first time since the recession began. Second, that same Case Shiller Index registered a year-over-year change of nil, the first time prices didn’t slip from the previous year in more than four years.

And looking below at the state of office vacancies, despite hitting the highest level since the 1990s, the rate at which office space is going dark appears to be slowing.

So is that it, are we out of the woods? Not exactly.

Data is easily manipulated and subject to bias, even when its collectors have the best intentions. Let’s look at Case Shiller and dig into just what the data tell us.

Case Shiller looks at paired sales to determine home price changes. In other words, researchers compare sale prices of individual homes in a given month to the last time that house sold. Add in a bit of statistical wizardry and you have a pretty good metric for home price changes over time.

Case Shiller is also considered a value-weighted measure, as it weighs more expensive homes more heavily than cheaper ones. This makes some sense, since otherwise the relatively small number of high priced sales would get lost in the mix.

The implications of this is that an increase in the Case Shiller Home Price Index could either indicate true appreciation, or a shift in data where if more higher priced homes started selling, prices would look like they were rising when in fact, it was something else entirely.

Case in point: Livermore, CA - one of the cities we highlight in this month’s Talking Charts. By measuring price per square foot, which we use as a broad proxy of value, it appears that prices have flat lined for the past 12 months or so. Meanwhile, looking at median prices (a metric commonly used by the National Association of Realtors), prices are up 13.4% in the past 12 months. Quite a difference.

As we edge forward, keep in mind that there is more going on underneath the data than it appears. Always look at trends on as defined a level as possible. Look at cities not countries, zip codes not cities, neighborhoods not cities. Only by drilling deep into the data will it truly help you make better real estate decisions.

The housing market got another boost this morning, as July’s S&P Case/Shiller Home Price Index registered its biggest monthly increase in almost four years. The 20-city index rose 1.2% in July from the month before, the biggest jump since October 2005, according to Bloomberg.

Even though the monthly price figures have been increasing now for the last few months, year-over-year prices are still down. However, declines are becoming less severe.

And the debate continues as to whether this reflects a legitimate housing recovery or whether the Case/Shiller data — which is not seasonally adjusted — is simply reflecting the strong summer buying season, made stronger buy vast government support and banks’ reticence to list their inventory of REO properties.

As the months roll on, we’ll be keeping a careful on eye on the data to try and determine just how real this recovery is. And remember, Case/Shiller data lags, here we are almost to October and just now finding out what happened in July!

Broad measures of home prices continue to show improvements, as the S&P/Case Shiller Home Price Index registered its second straight monthly increase. According to the Wall Street Journal, Case Shiller’s 20-city index ticked up on a quarterly basis 1.4% from the three months ending May 31.

2 cities still showed month-over-month declines, woeful Detroit and Las Vegas. The only cities showing single digit annual declines, Dallas, Cleveland, Denver, Boston and Charlotte, were some of the markets that held up longer than most, and are still in the early stages of their price correction.

Yale’s Robert Shiller, who along with Carl Case devised the Case-Shiller Home Price Index, warns that despite the positive data, foreclosures and job losses could still hamper any legitimate housing recovery. Mortgage defaults, especially in the Prime market, continue to rise, which is leading to increased inventory and falling prices in high-end real estate markets around the country.

The experts at Cirios Real Estate are watching the data closely, especially as the summer buying season shuts down and we move into the traditionally slow fourth quarter. This transition will be the first true test of this housing “recovery.”

This post first appeared on Minyanville.

It only took 18 months, but the fact that the US luxury real estate market is falling apart at the seams is finally starting to sink in.

Yesterday’s Wall Street Journal chronicled the plight of high-end housing markets, as formerly wealthy homeowners are falling behind on their mortgages at an astounding rate. Defaults and foreclosures are increasing in the Jumbo Prime mortgage space — big loans made to borrowers who were supposed to be good credits — at a faster clip than in any other segment of the market. This is causing distressed or otherwise forced sales, resulting in the type of Price Discovery that can send vulnerable markets reeling.

Meanwhile, cheaper markets have, by and large, experienced the worst of this vicious whoosh down and are now groping for a bottom. Some of these distressed areas — the fortunate few that were allowed to experience a legitimate correction before government-sponsored foreclosure moratorium set a true stabilization back months, if not years — have laid the groundwork for a long, arduous recovery. Others, prevented from finding a bottom on their own, will be suffering from a years-long slow bleed of inventory, crushing the hopes of local real estate investors and first-time buyers and sending capital elsewhere.

As Wells Fargo (WFC), Bank of America (BAC), Citigroup (C), and JPMorgan (JPM) — the biggest holders of property in the country — continue to bow to White House demands to keep housing inventory off the market, a legitimate sustainable recovery in housing will remain elusive. This matters little for high-end markets, however, as prices are screaming downward whether the government likes it or not.

What few media outlets are covering is how the upwards spreading of the housing infection will affect widely reported home-price data, and thus the psyche of the American home buyer. This is a subject I mentioned back in April, but now that the trend is becoming reality — as the Case Shiller Home Price Index registered its first monthly increase since 2006 — it warrants revisiting.

As defaults and foreclosures bleed into the high end of the market, buyers gain the upper hand in price negotiations as sellers become desperate. These forced sales will turn illiquid markets liquid as buyers that have been locked out of these expensive markets begin to scour the landscape for opportunities. As sale volumes pick up, so too will the average price of the homes eventually sold, since this will shift the distribution of transactions included in the broad averages towards more expensive homes.

This isn’t just some statistical anomaly: As broad measures of housing data show recovery, behind the curtain, individual submarkets will be telling a vastly different story. To be sure, the Jumbo market makes up less than 3% of the total housing market, but if it’s your market, that makes it 100% of the housing market that matters.

This post first Appeared in the August edition of Cirios Trends: Getting to the Bottom of the Housing Market

If there is a single trend we have been focused on here at Cirios throughout 2009, it’s the divergence between high-end real estate markets and broad measures of home prices. That is, even as recent housing market data shows encouraging signs of stabilization, most well-to-do areas continue to see material home price declines.

This divergence has persisted all year, and is now being covered widely in the financial press (See The Wall Street Journal’s recent article entitled “High-End Homes Miss Out in the Rebound”).

Behind this trend is a deterioration in the fundamentals in the Jumbo Prime mortgage market, as well as the impact from job losses among even high wage earners. According to the Field Check Group, a mortgage data analysis firm, Jumbo Prime mortgages are now entering foreclosure at a faster clip than any other segment of the market.

In other words, just like subprime mortgages saw a spike in defaults that predated swift home price declines, mortgages held by formerly low-risk borrowers are now going delinquent at an alarming rate. This does not bode well for expensive real estate markets.

And here is where it gets interesting.

The Chart of the Month in the top right corner of this page shows the Case-Shiller Home Price Index, a widely quoted measure of property values, which registered its first monthly increase in 3-years. So that’s it, we’ve bottomed, right?

Not exactly.

The Case Shiller Index is a value-weighted metric, meaning more expensive homes are given more weight than cheaper ones. And as higher end markets become increasingly distressed and sales activity picks up, these more expensive sales will start to drag up broad measures of home prices, like the Case Shiller. This is a dynamic we discussed back in April, which is now becoming reality.

So even as pundits and real estate professionals everywhere scramble to call yet another bottom in the housing market, savvy buyers should be wary of such proclamations. Sure, while certain lower end markets are seeing signs of stabilization (against the backdrop of artificially low supply due to government intervention into the housing market), this is not so for high-end markets.

Real estate will remain, as it always has been and always will be, local. As such, any recovery will be extremely market-specific. In other words, saying the “housing market” has bottomed, or is bottoming, is meaningless.

You don’t buy a house that’s in the “California” market, or even the “San Mateo” market — homes are in neighborhoods and on streets. No amount of number crunching can tell you the direction of the value of a single house. Keep this in mind next time a real estate professional tells you “It’s a great time to buy.” It may be — but how do they know?

The housing market got another piece of “good” data today, as the S&P Case Shiller Home Price Index registered its first month-over-month uptick in almost 3 years, according to Bloomberg. The increase was nominal, to be sure, at a mere 0.5% from the prior month, but it was an increase nonetheless.

As can be seen by the graph below, the 20-city composite index is back to where it was in May 2003.

(click to enlarge)

Taking a look at the California markets included in the survey, markets in the Golden State have corrected further than the nation as a whole:
San Francisco - August 2000
San Diego - August 2002
Los Angeles - August 2003

(click to enlarge)

Keep in mind, as we do our best to reiterate here at Cirios, that these broad measures may or may not be relevant to an individual, local market. Home prices in San Francisco proper are down around 20% from the peak, while the metro area has seen declines of more than 45%. Brentwood, Antioch and other parts of Contra Costa county, on the other hand, have seen declines of 60% or more.

We will continue to monitor this measure as an indication of broad, national and statewide trends, but ignore this data when it comes to evaluating individual homes. Have a property you’ve seen and our want our professional opinion? Send it to us info@ciriosre.com and we’ll take a look!

This morning, the S&P Case/Shiller Home Price Index, which measures prices in 20 US metropolitan regions, registered an 18.1% decline in prices. And for as bad as this sounds, its actually the best reading in 6 months. According to Bloomberg, one of the index’s designers, Yale economist Robert Shiller said he saw “striking improvement in the rate of decline” in April.

No metro area experienced year-over-year gains, but declines from the previous month eased for the 3rd month in a row. Las Vegas is still in horrible shape, tallying a 32% year-over-year tumble, along with Phoenix where prices have fallen more than 35% from last year. Phoenix is down more than 50% since the peak in June 2006.

As high end markets continue to tumble while low end markets grope for a bottom, it will be interesting to see if the Case/Shiller Index — which is a value-weighted measurement, ie, it weighs higher value homes more than low value ones — diverges from median home price data reported by the National Association of Realtors.

For more on how to dissect average price data, please read Straight Up Statistics - Deconstructing the Average.

By ANDREW JEFFERY

The broken record rambles on: Home prices keep falling.

The latest reading from the S&P/Case Shiller Home Price Index showed another record decline, as prices tumbled 18.5% from a year ago. And again, the worst performing metro regions were out west, with Phoenix, Las Vegas and San Francisco leading the way to the downside. The 20-city index has now slid 27% from its 2006 peak.

The ongoing home price declines, which many attribute to steadily rising foreclosures helped spur the latest government-backed efforts to rescue the housing market. And while most commentators heavily criticized the Obama Administration’s $275 billion housing relief plan, take a read of Cirios’ Austin Nelson’s excellent take — a little optimism never hurt anyone, especially with the resounding and ubiquitous negativity we read in the daily headlines.

There isn’t much new to glean from the latest Case-Shiller Home Price Index, it’s still just bad out there. However dire the data continue to be, keep in mind home sales transactions typically bottom prior to prices. In the markets first to see precipitous declines, Cirios data analysis indicates ongoing increases in sales. And while the most distressed areas certainly show the strongest rises in transactions, mid-range areas are seeing more activity as well. Not so for the high end, where buying activity has all but evaporated.

But you, our Cirios readers, already knew that.

Far from being a bottom call, this is trend an example of the housing correction at work. While we would argue prices will continue to decline for foreseeable future, the reality is that homes are more affordable today than they were yesterday. And will be more so tomorrow. And tomorrow. And so on.

At some point in every market, prices begin to make sense again and buyers gingerly step into the water. The sharks are still circling, to be sure, but most are full and lazy, the new arrivals having more and more trouble finding a tasty snack.

By AUSTIN NELSON

How many times have you read a statistic like this one: “57% of Americans believe that the economy will do X in the next Y years”? Ever wondered how in the heck they can say something like that? Do they poll every American and ask them what they think?

The answer, of course, is no.

Through a series of statistical tricks, it is usually perfectly acceptable to make statements like the one above using only a small sample size. For national poll results, usually between 1000-2000 people suffice. Scientifically speaking, much can be inferred from such a sample, and its accuracy can be evaluated mathematically (hence the ubiquitous +/- 3% info that follows all poll data).

The goal of polling any sample is to get enough people to gather a representative group, without going overboard and designing polls that would take months to perform. The problem — and this is where one can get into trouble with polls and other studies using small samples to evaluate a large population — is in the process of sampling itself. For instance, in “nationwide” polls like one that could get the datum described above, polls are often conducted by phone, with pollsters “randomly” selecting people to poll and collecting the results.

But what does “random” mean? Presumably, these pollsters have a method akin to pulling a name out of a hat filled with every name in the phone book. There are a few problems with this assumption of “randomness.”  The first is that not everyone is in the phone book. The second, and more significant problem with this methodology, is that it takes a very specific kind of person to a) actually answer the phone when someone calls from a number they don’t know and b) actually stay on the line when the person on the other end announces they just need “a few minutes.” By choosing to interview people by phone, the pollsters have actually thrown random out the window and left a large portion of America out of their study entirely.

Now, Im not saying that every national poll is worthless. Far from it. In fact, polls can be very informative as to trends in public opinion because you can accurately compare the results of the same poll over time. But it should never be assumed, not even for one moment, that if the poll says 57% of Americans do whatever, that 57% of Americans in real life actually do that (even including the stated error range).

Sampling is a big issue in any area of scientific inquiry. The assumptions that underlie any statistical analysis are very specific as to the requirements for sampling. Outside of the physics laboratory, these assumptions are almost never met. However, through careful design and data acquisition, one can make a reasonable stab at satisfying their requirements.

One good example of this is the Case-Shiller home price index, or CSHPI. As described previously by Andrew Jeffery, the index uses paired-sale comparisons to evaluate current trends in housing markets. Their methodology is opaquely complex but freely available for the world to see.

Some argue against the method, saying that by only sampling homes that have repeat sales within a given time period, you leave out a huge chunk of homes whose sales could give you insight into home values in its area. This is true, and the CSHPI is far from perfect as a result, but there is simply no way one can achieve perfection in an undertaking like modeling home prices.

The important thing to keep in mind is that with the CSHPI, you know what exactly what you are getting — and what you’re not.

Is the index a perfect indicator for what is going on in Brentwood, CA or Mesa, AZ? Absolutely not, and anyone who tells you otherwise is selling you something you don’t want to buy. But it is a painstakingly accurate and admirably well-designed method for tracking trends on a large scale level. That it leaves a large chunk of the market out of its samples is an inevitable aspect of proper experimental design.

Only by controlling as many variables as possible (in this case, by only comparing one house to itself rather than every other house that has sold within a given time frame) can one hope to do any meaningful analysis of a market as complex as residential real estate.

Because of the way it is constructed, the index itself is really only valuable as a tracker of large scale trends. If the index goes down by 10%, you can’t reasonably say that any given property has declined by 10% or even use it to reliably estimate the price change of a specific property. But if the index has shown a 25% drop from its peak (as it has), you can reliably infer that things are not going well in US housing. By tracking the rate of that decline or the difference in trends between the individual indices of one metro area versus another (there are indices available for 20 metropolitan areas), one can gain valuable and reliable insight about the performance of those markets and make inferences about future trends.

In conclusion, sampling is one of the most important but least appreciated aspects of modern data analysis. In order to correctly interpret any given data, it is absolutely essential to know how that data was sampled and how that sample fits into the area of study. Be wary of data where the data collection and analysis methodology are not freely available. And understand that where samples are involved, usually the most valuable way to use that data is to monitor changes over time rather than making inferences about how any given time period’s data relates to whatever phenomenon you are interested in.

This is especially true when it comes to home values, where there is absolutely no single data model that can tell you how much your house is worth or how much to pay for that new house you’ve got your eye on. However, there is enough data currently available that with careful scrutiny (and the help of trained professionals like the friendly folks at Cirios Real Estate) you can confidently make those assessments.

By ANDREW JEFFERY

In contrast to the silver lining of higher-than-expected home sales tallied in yesterday’s release of Existing Home Sales, this morning’s Case-Shiller November Home Price Index registered the worst year-over-year performance on record.

Property values in November 2008 tumbled 18.2% from the prior year and 2.2% from the previous month. As measured by the Case-Shiller’s 20-city index, home prices have retreated 25% from their mid-2006 peak and now sit close to levels not seen since 2004.

Like a CD stuck on repeat in the guy down the hall’s dorm room while he is away at class (you try listening to Chumbawumba’s Tubthumping for 3-hours straight and not being driven to drink at 3pm), annual price declines were the worst in Phoenix and Las Vegas, followed by San Francisco, Miami, Los Angeles and San Diego.

News that home prices are falling, however, isn’t exactly news. So let’s look at what this Case-Shiller Home Price Index is anyway, and how it differs from the less murky Median Home Price data released every month by our friends at the National Association of Realtors (the NAR).

As Cirios statistics’ wizard Austin Nelson explained last week, the median home price is simply the middle price in a list of sales. So, the NAR grabs data on all home sales in a given month and picks out the one with the same number of sales on either side. The logic behind using this measure, rather than the more commonly understood average, is that it reduces the effect of outliers, or sale prices that are either much higher or much lower than the prevailing trend.

Case-Shiller, on the other hand, uses what are known as “paired sales” to evaluate home prices. By examining sales in a given month, then looking back to find the most recent sale price and date for each house, statisticians are able to back into an annual rate of decline.

For example, if house A sold in November ‘07 for $250,000 and again in November ‘08 for $200,000, Case-Shiller would say the annual home price decline was 20%. By limiting the search only to sales that have a relevant pair (ie, previous sale), the methodology limits sample size, potentially leaving margin for sampling errors. Sample size is something I’ll let Professor Nelson explain in further detail at a later date.

So, which method is better, paired sales or median price? As is typical with such economic questions, the answer is a resounding neither.

Median Home Price measurements provide good information about the distribution of sales, and in the current environment reflect that since Jumbo mortgages are nigh impossible to get and foreclosure sales are driving most markets, cheaper houses are selling far more often than more expensive ones.

Case-Shiller, on the other hand, represents a more accurate level of home price declines for specific homes — far more important to the average homeowners. Of course, a number slapped on a metro area is fairly meaningless when it comes to an individual property, but it’s still more useful than a bucket of houses being sold for different reasons by different sellers in different neighborhoods.

With Case-Shiller a month behind the NAR data, keep an eye out next month to see if the silver lining found in December’s median home sales data is reflected in the paired sales analysis. If it is, you can be sure calls for a bottom in housing will once again abound.