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S&P Case-Shiller housing index probably overweights foreclosure sales July 9, 2009

Posted by John Watch in News Feed.
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“What I notice is that the sales pair counts are becoming increasingly weighted toward the biggest bubble – i.e., foreclosure – metro areas: LA, San Diego, Phoenix, etc. Sales in these areas are really dragging down the overall value of the index. Presumably, the foreclosure sales are weighted less heavily, but it is somewhat suspect to me that the share of Phoenix’s housing market, for example, has increased its share of pair counts by 8.7% over its sample average, 5.4%.”

We agree with Rebecca Wilder.

In her July 2 article, Rebecca discusses the S&P Case-Shiller index and how it could be potentially creating a foreclosure bias when weighting its 20 city index.

Thank you, thank you!

We have been analyzing the Case Shiller data for years and as you have indicated very concisely, the index does have a potential for bias.

Your direct comment about Phoenix and Arizona hits the mark. Case Shiller refers to the overall sales price and does not consider the fundamentals of the sale price such as square footage, age of home and land area. Nor, in our opinion does it recognize the weight of the general population size to sales activity size.

Based on property data and public records, our analysis indicates that the price decline, if developed on a sales price per square foot basis, is not as drastic. Furthermore if you establish a weighting influence for the impact of foreclosures, the decline would be even less.

Maricopa County (Phoenix) had a study completed to determine the influence of foreclosures for assessment purposes. This report clearly shows a differential of 10% to 15% (depending on level of foreclosures). This report is based on the sales price per square foot. So if 1.5 million homes in the 5th largest city are valued recognizing these influences, why isn’t Case Shiller recognizing this.

Many will argue that foreclosures are market value and hence are the market. In my opinion this is not true. Yes foreclosures influence the market, but adjustments must be considered for these sales under market conditions and financing in an appraisal.

In addition to your comments on all of the regions, I will clearly state this: More weight should be developed based on the general population of properties, not the sales activity alone.

Kudos’s for pointing this out. Case Shiller represents two-thirds of the housing market? Well what is it leaving out? An index that tracts Metro Market should be based on a consistent parameter (say 60 mile radius) and it should identify the total properties covered, residential properties and annual sales activity. This index should also categorize properties into groups. I find it very difficult to accept that a 1,000 square foot house has the same economic and demographic buyer as a 2,500 square foot house.

Yes, I understand the need for a general overview, but the resources exist for a more expansive index and it should be developed. This is no easy task. Our current property data tracking covers 45 million properties versus Case Shiller at 70 million. Our analysis clearly indicates that Case Shiller, while being a benchmark is not a true indicator of the overall market.

Based on this past real estate crisis, we simply cannot afford to use indexes that lack total coverage and stratification levels which will enable financial institutions, realtors, builders and the general public the ability to understand a very complex financial market.

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1. Gary Hancock - July 15, 2009

Can you explain what you mean by “general population of properties”


In addition to your comments on all of the regions, I will clearly state this: More weight should be developed based on the general population of properties, not the sales activity alone.

2. John Watch - July 15, 2009

General Poulation of Properties refers to the total properties in a region versus the sales. For example if a region has 10% of all current sales, but the general population represents 1% of the overall market, the sales will carry more weight than they should. This is an issue that is common with the median and mean (average). Most statisticians will use the weighted mean or adjust the weight based on the PRD factor.

3. Real Estate Mania: Bears vs. Bulls in a City Near You! « AccuriZ - August 31, 2009

[…] has been noted before that Case-Shiller Index probably over weights foreclosure sales (Reported by AccuriZ and NewsnEconomics).  Foreclosure-metro areas have been more heavily […]

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