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The Trouble With Case Shiller

The mainstream media wasted hours reporting on and analyzing the Case Shiller Housing Index today. Did even one pundit mention what’s wrong with the Case Shiller data? If Dow Jones used the methodology to report the Dow Industrials that Standard and Poors uses to construct the Case Shiller Index (CSI) the Dow would be reported as being at 10,650, when in reality, it’s at roughly 10,800. 10,650 is where the Dow’s 3 month moving average was at the end of May.

“What does that have to do with now?” you ask. “Exactly!” I say. “Absolutely nothing!” The fact that the numbers aren’t too far apart is coincidental. If this market were trending down instead of rangebound, the Dow could be at 10,000 instead of the 10,650 that would be reported under this method. The same is true of the housing market. The CSI doesn’t remotely represent the current state of the housing market, which is, in fact, much lower than where the CSI shows it to be, and it has been trending drastically lower when the CSI shows it being relatively flat recently.

Why is the Case Shiller data both inaccurate and misleading relative to current market conditions? Let’s see. The data is collected from a month ended two months ago, in today’s case, July. That data is from public sources for CLOSED sales, NOT then current contracts. So the currently reported data represents sales that happened mostly in two months before that, which would be May. Then that data is aggregated with the data collected in the two previous months, for sales contracts from the 2 months before that (March and April), and reported as an average price for the 3 months. The theoretical midpoint of the data reported now is from 3½ months ago, representing the average contract price from roughly 5½ months ago. In other words, today’s CSI represents average selling prices as of the MIDDLE OF APRIL when the homebuyers’ tax credit was still skewing the market upward.

As soon as that distortion was removed from the market, prices collapsed. CSI isn’t showing that. Other data, such as the Commerce Department’s new home sales price data is. Still more current data than that is also showing a sharp drop which is continuing right up to today.

The media and its captive economist pundits treat the CSI as somehow being a good indication of current market conditions. It’s anything but. It’s wrong, and dangerously misleading.

The National Association of Realtors knows the real story. They track current contract prices in their MLS databases. But they choose not to share this information with the public. It is not in their industry’s interest to do so. If you want to know the real story, you need a few friends in the business around the US. Or you could use some of the tracking services that I look at when researching the housing market for the Wall Street Examiner Professional Edition. Those data sources are current, and they have proven to be highly reliable trend indicators when compared with the closed sales data released months later.

The closed sales information doesn’t reach the public until after the sales are reported in the public records of each county. That’s usually a month after the sale closes, hence the 3 month lag between the time the property goes under contract and the time the public has first news of that sale. It takes S&P another month to collect and assemble the data into the CSI indexes. That’s why they are so late. Case Shiller’s methodology of then reporting only a 3 month moving average as if it were the most recent prices further compounds the misimpression. The goal of smoothing the data only serves to slow it down and render it even more inaccurate.

There are current indicators of the real estate market that have a good track record of reflecting sales prices. They tell a very different story than Case Shiller. In fact it is a story diametrically opposed to the “market is stable,” crap that the mainstream media has been trumpeting today. The Commerce Department’s recently released new home sales price data for August show new house prices plunging sharply in July and August. That’s a much truer picture of the current state of the market. Other more current data shows that far from being flat, the markets covered by the CSI have declined by an average of 3.7% over the past 3 months through September 27.

I invite you to check out all of the relevant data for yourself. I’ll be posting an updated Wall Street Examiner Professional Edition Housing Report this evening.

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Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish LiquidityTrader.com, and was lead analyst for Sure Money Investor, of blessed memory. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both sales, analytical, and trading capacities. Prior to starting the Wall Street Examiner I was a commercial real estate appraiser in Florida for 15 years. I was considered an expert in the analysis of failed properties that ended up in the hands of bank REO divisions, the FDIC, and the RTC. Remember those guys? I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. I'm not some Ivory Tower academic, Wall Street guy. My perspective comes from having my boots on the ground and in the trenches, as a real estate broker, mortgage broker, trader, account rep, and analyst. I've watched most of the games these Wall Street wiseguys play from right up close. I know the drill from my 55 years of paying attention. And I'm happy to share that experience with you, right here. 

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