The mainstream media reported the Case Shiller Index for “May.” I put that in quotes because the data does not represent the actual state of the market in May.
Case Shiller represents the 3 month average price of repeat sales (not all sales, just houses that had sold previously) which were recorded by county agencies in March, April, and May. It is now the end of July.
Since real estate closings typically occur 30-90 days after the contract is signed, the current Case Shiller Index represents average market values of repeat sales (not all sales) in February, March, and April. So in spite of the fact that the headlines said May, in reality the index represents a smoothed version of the average state of the market for February through April, not May.
The question is why anybody cares about that number now, at the end of July. Do we report the Dow’s average price in March now? The media makes a big deal here over old news which by now could be completely wrong.
We need to know where the market is now, not where it was in February or March. I assure you, your local real estate agents know the current state of the market even if Bloomberg, The Wall Street Journal, and Robert Shiller and Carl Case don’t. Corelogic, which now owns the Case Shiller Index, has access to current contract values. Why aren’t they aggregating and reporting that instead of data that is old, stale, and useless? In fact, Corelogic does that as a minor, incomplete, single graphic in its monthly market updates. Nobody pays attention to that.
Yes, data is available on the current state of the market. The Realtors’ MLS has current contracts in its database, but they don’t bother to report it publicly. Fortunately, online broker Redfin does. They post the information around the middle of each month for the preceding month. In mid July, they posted median contract values for the 55 largest US metros in June.
Redfin reported that June contract prices rose 5.1% year to year to $285,200. The month to month increase was 1.6%, a sign of radical acceleration in housing inflation, but one month does not a trend make.
At typical qualifying ratios, and with a 10% down payment, the US median income household can afford to pay approximately $220,000 to purchase a house. The median priced home is well out of reach for median income families. Yet prices keep rising thanks to the shortage of supply.
The 5.1% year to year gain in June is greater than the +4.9% which the Case Shiller 20 Index showed for February-March-April contracts. In March and April, contract prices rose +5.7% and +6.5% respectively, so there may have been some giveback in June. But the key point is that Case Shiller is understating the rate of increase. The average increase in contract prices over the 3 months was +5.7%, not 4.9%.
This is in part due to the excessive smoothing in Case Shiller, and in part due to Case Shiller’s use of repeat sales only. That helps to suppress the number by showing only the sales of older houses, many of which have suffered physical and functional depreciation if owners did not maintain and upgraded them to the current standards in the marketplace. The Case Shiller Index is so seriously deficient for those reasons, that it is stunning that the mainstream media and market pundits generally give it any credence. It simply does not represent the current state of the market.
Even Corelogic reported that closed sale prices rose by 6.3% in May, and that contract prices tacked on another +0.9% in June. The NAR showed a gain of 6.5% for sales closed in June after a +7.9% reading in May.
Case Shiller’s tendency to understate housing inflation is not new. It has been clear for years that Case Shiller has lagged and suppressed the actual rate of housing inflation, yet mainstream pundits continue to treat it as if it is the holy grail.
If it were the holy grail, Robert Shiller would not have so egregiously missed the bottom in prices in 2011-12. It took another year before he woke up. If you design an index to severely lag and suppress the actual price increases occurring in the marketplace, you will be late, that’s for sure.
Housing prices today are rising at least 1% faster than Case Shiller indicates, and in the vast majority of markets they are increasing far faster than that. The housing inflation rate has not stabilized as the Wall Street Journal suggested today.
The percentage changes are reported on the basis of a national median. We all know that real estate is local. While a few severely economically depressed markets are holding down the national median, many others are, dare we say it, in bubbles.
Redfin’s data showed that 35 of the 55 largest US metros had year to year gains of greater than 5.1% in June. Excluding the 3 depressed markets that were negative year to year (Baltimore, Honolulu, Hudson Valley NY), the unweighted average gain of the remaining 52 markets was +7.1%.
26 markets had gains greater than 7.1%. The average gain in these markets was +10%. 9 of the markets had double digit gains. In the 26 markets where the gains were less than 7.1%, the unweighted average gain was +4.1%.
Even those less ebullient markets are inflating at a rate far greater than the CPI, which does not include housing prices. Houses prices, after all, don’t “inflate,” they “appreciate.” Yay.
With half the country’s housing inflating at an average of 10%, I’d say that’s a housing bubble. Remember that in the Great Bubble of 2003-2006 not all markets were rising radically either. There were a few that stuck out like a sore thumb. Those same markets are red and swollen today, names like San Francisco, LA, San Jose, Miami, Fort Lauderdale and Tampa. Even Las Vegas, which got clobbered in the crash, is now humming along at a 9.8% annual increase.
Below is Redfin’s tabulation of the MLS current contract price data for the 55 large US Metros. Learn it. Study it. Because one day soon it’s going to test you and me and everybody else. It will start going the other way. And when it does, Case Shiller will once again be left in the dust, behind the curve as always. And the US financial system will once again be torn apart under the stress of falling housing collateral values.