The Media

During the beginning of the 21^st century the media queried “when will the boom bust?” Now the daily headlines claim the American real estate markets are falling, homes are losing value, the mortgage markets have seized up and institutions are reluctant to lend against an asset declining in value. But what if the headlines are not quite accurate? What if the data is distorted and the distortions are being sensationalized?

The Data
Given the importance of the outcome, now is the time to scrutinize before fiction becomes reality. Today’s headlines are provided largely courtesy of the S &P Case Shiller Index. This index has replaced two older indexes on the front page of American newspapers. One was the National Association of Realtors’ monthly price index and the other is the OFHEO index (Office of Federal Housing Economic Oversight). The latter two use rather different methodologies but over the years have reached remarkably similar conclusions about prices of homes in America. When different methodologies yield similar results, you get a good handle on reality.

Today we don’t hear much about either index. Instead, the Case Shiller index is everywhere with its ominous message. The index talks about a 15% price decline in Miami and 5.6% for the year in New York. Bloomberg quotes Shiller: “We are in an historic housing bust right now.” Is Shiller right? The importance of the question forces us to look through the other lenses of NAR and OFHEO.

OFHEO has been keeping a national index for years and publishes monthly a one inch thick book on housing prices. It says that in 2007 the average price in America was down .03%. Yes, that is three tenths of one percent, not Shiller’s 8.9%. Compared to OFHEO Shiller’s index overstates the decline by 29 times or 2900%.

The National Association of Realtors index showed a median 1.4% decline nationally after 64 years of un-interrupted gains. Compared to NAR’s 1.4% median price decline, Shiller overstates the “freefall” by 6.3 times or over 600%. The 2007 OFHEO and NAR numbers possibly demonstrate not weakness, but rather resiliency.

Additionally, the 2007 report from Realogy, the largest real estate brokerage company in the world came out also disputing Shiller. Realogy owns the Century 21, Coldwell Banker,and Sotheby’s, among other brokerages. They have over 300,000 agents, or about one-fourth of the members of the National Association of Realtors. So these are real people doing real business every day, not in a Yale think tank. Realogy reported that their average price in 2007 was down 1%, right in line with the NAR and OFHEO data. Again Shiller alone points to much more calamitous and foreboding results. Is there a reason why?

Some think it may have to do with methodology. Shiller and OFHEO’s are both repeat sales indexes whereas NAR’s data and that of Realogy take all sales volume and divide it by unit sales to get an average price and then figure out the median. Still, even using different methodologies, three out of four give one clear answer, that prices have fallen about 1%, while Shiller points to a 9 times greater fall.

The Manipulation
Shiller issues national press releases monthly but his index is anything but national unlike OFHEO, NAR and Realogy’s data, Shiller covers completely only 8 states and partially another 13. He has no data from 29 states. The eight states completely covered are among the weakest in the nation. The Wall Street Journal wrote several weeks ago that Shiller’s index may be negatively biased.

Shiller claims to cover 20 markets however, Shiller does not report on cities, but on MSA’s, short for Metropolitan Statistical Areas. This leads to some remarkable distortions.

For instance, Shiller claims New York prices fell 5.6% in 2007 versus an index created by Manhattan based Miller Samuel that says the average Manhattan price rose 17.6%. The two are reporting apples and oranges but which gives the more correct impression? Miller Samuel tracks coop and condo sales in Manhattan and Manhattan is what most people think of when they think of “New York.” Shiller’s index, expressly excludes condominiums and coops which account for 1/3 of New York City sales and 99% of Manhattan sales. Thus, Shiller gives the impression of reporting that prices have dropped 5.6% in a place where he does not cover 99% of the sales and where prices have not dropped but risen, substantially.

Even more perversely, Schiller’s MSA for “New York” tracks sales in Putnam County, two hours north, and single family home sales in Bergen County, New Jersey and home prices out on Long Island. Trailer park sales in Putnam County are in his “New York” index, but NOT Manhatten condos and co-ops!

The Recognition
Criticisms of Shiller’s inaccuracies are growing. RealTrends, a national industry monthly, ran its January headline “Case Shiller Index Exposed” and ran a synopsis of a paper done by Andre Leventis of OFHEO in which it chronicles the “flaws in Case-Shiller that are traceable and have a huge impact on the variance between their reports and those of so many other reports, including NAR’s and our own.”

Lawrence Yun of the National Associations of Realtors (who was named by USA Today as one of the top ten economic forecasters for his accuracy) has ratcheted up his criticism of Shiller. Yun calls Shiller’s index a “total distortion of market conditions based upon a small selection of falling local metro coverage.”

OFHEO has also chimed in by indicating that 70% of markets nationwide are not falling but actually rising.

The bottom line is the best advice is to know your individual situation, your local market and weigh the pros and cons of buying and selling for -you to make the decision for your individual situation.

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