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Case Chiller – False, Phony, and Fictitious

I made a little chart yesterday for a free podcast that I didn’t have time to post over on Radio Free Wall Street. I’m discovering that it’s a lot quicker to type a post than it is to talk about an issue for a few minutes and then produce a decent sounding podcast.

But that’s neither here nor there. What’s here is the little chart and the point is that the Case Shiller Index (CSI for your real estate crime fans) is way behind the curve.

Click here to enlarge
Click here to enlarge

Now let me tell you why I think that’s the Case.

The real story of the market is in the new house sales prices. That data shows what happens when the time runs out to take advantage of Uncle Sam’s $8,000 first time home buyer credit. Since the program ends on November 30 and it takes at least 4 months to build a house from date of contract,  new house sales prices started to tank in August, completely wiping out the March to May bounce.  That bounce,  in my view, was entirely due to the government fist time home buyer prop job.

As an old real estate appraiser the first thing I do when considering a sale price is to make sure that it’s a cash equivalent sale price.  In this case, the March to May average sale prices should be adjusted down by some percentage of the $8,000 that buyers got from Uncle. That percentage would depend on just what percentage of all sales were impacted by the credit. One source I’ve read says it was 43%. So the credit would appear to account for about $3500 of the price gain that appeared last Spring. This doesn’t even consider the fact that demand was also artificially inflated. That probably had a bit of an impact as well.

The CSI as of  July, just now being reported, was up 3.6% from its April low. While we can’t convert that directly to dollars, it appears to correlate nicely the home buyer credit and the false demand uptick that resulted.

Now stay with me here. This is important. New house sales are reported to the Commerce Department at the TIME OF CONTRACT or when A DEPOSIT IS TAKEN, not at closing as with the NAR’s existing home sales, and especially not with the CSI. Case Shiller slows its data even more by using only data reported in the public records, then time smoothing and lagging it.

In August the incentive to first time home buyers ceased to exist for new house sales and looky, looky loo! Price plunged by a mere 9.5%, the biggest one month decline since at least 1994. That means probably forever.

The March to May supposed price gains were vaporized.



Meanwhile, all the economists and pundits, having no clue whatsoever how the Case Shiller data is compiled, are in a lather proclaiming that the housing recovery is under way completely ignoring the evidence that the price gains were artificial, fake, illusory, not real, bogus, false, phony, and fictitious.

Continued below

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Case Shiller uses a 3 month moving average and also filters out outliers from the data. Case Shiller uses paired sales. That is they compare the price of a house that sold with its last prior sale price. Then they filter the data to exclude large changes in a short period of time because that can mean that the house was remodeled or suffered some kind of damage if the change is negative. Fair enough.

But they also exclude sales that are outside historical statistical norms. For example, if Cleveland has big price changes for a few months, those changes are ignored because the price differentials are beyond statistical norms for the paired sales that they use. It matters not that the current sales probably represent reality, and the past sales fiction. They are outside historical norms, so they’re ignored.

On a national basis that’s just a minor matter that really doesn’t impact the national data much. Their data base is huge, and the numbers are a fair representation of smoothed historical changes. In fact, the Case Shiller data tracks the New House Sales, and the NAR’s existing home sales data pretty well. It’s just slower, a lot slower, and that’s what makes it so misleading right now.

Just the use of a 3 month moving average puts them behind the curve in the first place. The patterns of change are smoothed out and lagged by 6 weeks due to the effect of the moving average. Add to that the fact that they use closed sales data from public records. Public records are usually 3-4 weeks behind the actual sale. This is stale historical data.  It’s like using a 90 day moving average on a stock price chart from a month ago, and without looking at the daily price changes. You’re going to be a little late to the party. Very late.

The Case Shiller report was from July data. It’s smoothing methodology results in an average price as of mid May. That was four and a half months ago for goodness sakes. Things have changed a lot since then. They have gotten worse.

I threw in the Conference Bored Consumer Con Index, or the Con Con Con for short because it was also released yesterday. The CONference Bored is evidently a bunch of bored eCONomists sitting around with nothing better to do than conduct useless surveys. What a worthless indicator. It either follows the stock market or follows the housing market. It’s a follower, not a leader. Survey respondents get their clues either from the direction of stock prices, or lately, from the number of sales signs in their neighborhood. It’s not a pretty picture and they know it, but because of the way the Con Con Con is CONstructed, the eCONomists have conned themselves into believing something that isn’t true.

There are two components to the index, Expectations and Present Situation. has a nice chart of the two indexes. The Present Situation component, not surprisingly, is still flat on its butt near the lows set last spring. The Expectations index is far more volatile. It follows the stock market. When stocks took off in March, the Expectations Index followed.

The Con Con Con
The Con Con Con

There are a lot of fools out there who actually believe that the stock market leads the economy, including most eCONomists. The Con Board, made up of eCONomists,  thinks that its index tells something about the economy. Certainly they are right about the Present Situation Index. The Expectations Index, not so much. The people, it seems are very well aware that they remain much worse off than at any time in the 16 year history of this chart. Hope does spring eternal, but so does false hope.

I’m glad I’m not an economist. What an embarrassment that would be.

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  1. Diva

    Fed’s are going to have to lower the interest rate down to 1% in order to get the market jump started. Unemployment and curtailment of income are major factors, not to mention the millions of REO’s and charge offs that linger in secrecy and are stockpiling at a very rapid pace, there is no evidence of a bottom at this point with rising delinquencies in every major financial sector I would be very skeptical.

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