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.

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

As long time readers of this newsletter know, we at Cirios rail against the concept that “it’s a great time to buy,” irrespective of market condition. There is just too much that goes into the homebuying decision to make this sort of blanket statement. We urge clients and non-clients alike to be wary of Realtors bearing such oversimplifications, as if with some fancy chart or graphic they can assess the whole of the real estate market and the collective whims of all buyers therein. So, without further ado here are some charts and fancy graphics from which we will attempt to extrapolate the condition of the whole of the housing market.

In this month’s Zip Code Spotlight, we examined two areas of San Jose and tried to explain why neighborhoods with similar price points could have witnessed such divergent price trends. It all comes down to fundamentals, understanding why buyers are buying and why sellers are selling. The following two graphs attempt to break out one of those fundamental demand factors: The stock market. The stock market is most certainly not a rising tide that lifts all boats. First consider 94301, the well-to-do enclave of Palo Alto where Silicon Valley’s wealthy move to raise their children. Top notch schools and neighbors like Steve Jobs and Steve Young draw executives from around the Bay Area to settle in and settle down. It’s safe to say that the so-called “wealth effect” of rising (or falling) stock prices is strong in Palo Alto. The data above concur, as a home price spike in 2000-2001 matched the peak of the dotcom mania. Further, as stocks made all-time highs in 2007 even as the broader housing market had begun to roll over, 94301 home prices rose seemingly without worry.

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So now that we know rising stock prices are a reasonable determinant of rising home prices, let’s apply the analysis to a very different part of the Bay Area. Antioch, a small suburban community an hour east of San Francisco, is hanging onto the Bay Area at the fringe, just beyond the reaches of BART. Formerly an agricultural and industrial community, Antioch is known to be frequented by gangs and homebuilders alike. A quick glance at the chart above, tracking the same time period and movement in equity prices shows how important fundamentals are to understanding home price trends. To have bought a home in Antioch in 1996 with the expectation of price gains due to stock market gains would have shown a lack of understanding of what moved home prices in the area. As can be seen, all it took to move prices up was a bubble of a different kind.

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As the housing market began to roll over in 2006, the most frothy, speculative markets were the first to be hit: Phoenix, Vegas, Florida and the California Central Valley were the first to fall. Then last year, as government-backed foreclosure prevention initiatives began to squeeze inventories, some of those same distressed markets began to stabilize. But true stabilization and any eventual rebound will depend not on government programs, but underlying economic factors that support strong buying demand. By both looking at the data and examining actual transactions, it is becoming clear that cities further away from job centers are starting to falter. In fringe markets like Livermore, where economies were hit harder with layoffs, buying demand is starting to wane. Looking above, while prices stopped falling last year, gains are yet to materialize. In Fairfield, Livermore, Petaluma, Gilroy, and other far out suburbs we are starting to see cracks in the recovery. And as foreclosures are kicked down the road and more short sellers enter the market, expect more local market trends to start to mirror the one above — a long march sideways, at best.

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Hillsborough is one of the Bay Area’s most exclusive communities. With grand estates nestled in the hills, the wealthy and reclusive flock to this unique town. Here, despite the allure of hobnobbing with the elite, buying demand remains weak. In particular, the area’s largest homes appear to be in least demand. Even as affordable neighbors such as South San Francisco and Daly City see tight markets and strong demand, there is a dearth of buying activity in Hillsborough’s high end. In looking at the top 50% of sales as measured by home size, prices are still slipping. In particular, look at how many sales are happening below the trend line – a precursor of lower prices to come.