A Little Learning Can be a Dangerous Thing

As a five year old my elderly great-aunts told me that “A little learning is a dangerous thing”:  being certain without all the facts can lead to the wrong conclusion.  This was aptly illustrated by the sound bites accompanying the latest Case-Shiller Index release.  The Index was reported as falling in January by 0.8% from its December reading and as down 3.8% from January 2011.  The headlines announced that the housing market was off to a “rocky start” for the year as prices reached new lows.  As a friend of mine used to say, “We gave them the facts—just not all the facts.”  Put differently, the coverage was wrong, although the facts were presented in the Case-Shiller news release.

  • Case-Shiller reported that prices were down, year-over-year by 3.8%.  However, Case-Shiller’s results are based on a 20 city sample of housing prices, not representative of the total housing market.  As of January 2012 NAR’s numbers show that prices nationally were down by 2.2%.  Using February’s more recent data, NAR’s numbers show housing prices actually up by .3% year-over-year–not much, but starting to look like a move towards stabilization.
  • Case-Shiller’s reported prices for January are actually based on a 3 month moving average centered on December closings, reflecting contract signings in the September/October/November timeframes.    Case-Shiller information significantly lags the market.  In contrast, NAR’s reported sales closings and prices are actuals for the months of January and February.
  • On a month-to-month basis Case-Shiller reported prices down by .8 percent.  However, it is well established that month-to-month economic data should be evaluated on a seasonally adjusted basis.  On a seasonally adjusted basis, Case-Shiller reported price stability–a 0 percent change in price (not something that immediately grabs your attention from the headlines).
  • On a city-by-city basis, Case Shiller reported declining prices in Denver (-.6%) and Seattle

(-.7%); however, seasonally adjusted prices were actually up (Denver +.7%, Seattle +.8%).  There were a total of 5 cases in the 20 city sample of negative/positive changes.

What does this mean for Realtors?

Your clients probably heard the sound bites on Case-Shiller—i.e., continued falling prices.  Quoting Dragnet’s Joe Friday—“Just the facts Ma’am, just the facts”–here are the facts:

  • In terms of sales closed, January and February were the best months in five years.
  • In terms of prices, preliminary February NAR data shows prices starting to stabilize; whether this continues will depend on the economic outlook (Will Europe default? Will the Federal budget be a buster, etc.), but most economists think we are near the housing market bottom with stabilization on the horizon.
  • Finally, month-to-month pricing is irrelevant—your clients will probably hold the house for 8 years or so “on average”, and prices and mortgage rates are reasonable right now.  Nobody has a crystal ball, but who thinks prices will be lower in 8 years?

Economists have various successes in forecasting, but this one seems to be a no-brainer:  the sound bites for Case-Shiller weren’t really on target.

Jed Smith, Managing Director, Quantitative Research

Jed Smith is Managing Director, Quantitative Research with the National Association of Realtors®. He has worked on real estate issues for the past 20 years, providing input on a variety of housing, commercial real estate, tax, and planning issues. Recently he has been involved in several international studies.

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  1. A little denial can be a dangerous thing too. A true professional gets their infomation from multiple neutral sources if they care about being honest with their clients. “NAR says duh, duh, duh, duh,” is not really being honest.

    Of course all areas are different but anyone considering shadow inventory, default rates, employment, buyer sentiment, interest rates and lending practices has to know we’re no where close to a bottom. A market can’t be sustained for long by impatient investors and wealthy foreigners.