Have home prices gone up? In short, Yes.
This article will examine and prove this through looking at the NWMLS and Case Shiller statistics.
The Seattle Times published an article in May 2009 saying that Seattle home prices fell 2% over the last reporting period.
The Northwest Multiple Listing Service (NWMLS), a key source of data for the Seattle Times, published a report in May that showed area home prices going UP 4.4% over the previous month.
So who is right? The big question. Buyers, Sellers and Sideline Spectators want to know. Are home prices going up or down?
S&P Case Shiller Index
The Case-Shiller Index (CS) was created by two well known economics professors, Karl Case and Robert Shiller. The CS aggregates 20 metro areas into one national home price index. One of the 20 metro areas is the Seattle/Tacoma/Everett area. The index tracks local house prices and reflects those weightings in their national index. You frequently see this data on CNN.com and other national media outlets. A few things that set this index apart from the traditional NWMLS statistics are:
1) The Case-Shiller index tracks single family houses only- condos are tracked on a smaller separate index
2) The Case-Shiller index uses the Repeat Sales Pairing Method- Huh? The CS tracks THE EXACT house selling in two discrete instances over a period of time. Same property. Same address. If the exact property sold in 2000 for $300k and 2005 for $400k then it would qualify. If the price discrepancy from one transaction to another is abnormal- then they “normalize” the data. This is because the CS model assumes that the house has been substantially remodeled or improved- skewing the true price appreciation or depreciation.
3) The Case-Shiller index is more focused on key metro areas- while most NWMLS statistics are aggregated throughout King County.
4) The Case-Shiller is reported on a two month lag. The March numbers weren’t published until the last week of May, while the NWMLS will post May statistics in the first week of June. This is a big deal since real estate is already reported on a one month lag as is (February sales don’t close until March).
Northwest Multiple Listing Service
The NWMLS is the online service that all major realty brokers use. It is indispensable when analyzing local real estate. It is powerful as it tracks all “Listed” properties in regards to their list price, sale price, pictures, days on market and other valuable information. It aggregates statistics on a neighborhood and month by month basis.
The NWMLS can present statistics on Residential (single family homes only) or aggregate Residential and Condo. Of course, it can present Condo only reports as well. The NWMLS covers the entire county including rural and suburban areas. The NWMLS covers ALL “listed” sales- not just repeat sales of the same house like the Case-Shiller. The NWMLS gives fresher data- which is important as the market is changing on a month over month basis. Buyers and sellers are being influenced immediately by national media, local economics, consumer sentiment, the stock market and housing supply and demand. Every month can be very different.
For instance- the stock market was poor in February 2009, bottoming on March 9th. March is typically a strong month- but March 2009 was weak largely based on national economic, stock market, and job uncertainty during the month of February.
One major flaw in the NWMLS- which the Case-Shiller attempts to address- is that it tracks median sales price of all listed sales irrespective of the size and quality of houses included. The flaw in that method is as follows-
Take a random month of June and the random neighborhood of Kirkland. The area for the month may have sold 25 houses- 20 of which were 3000+ sq ft new construction two story houses with water views. That next July, 30 houses might have sold- but 20 of those 30 may have been 1200 sq foot ramblers built in 1965 in average neighborhoods. If you took the median price in June and saw a lower median price in July does that really prove that prices had dropped? You get the point.
The Case-Shiller tracks the SAME house selling over time and tries to eliminate huge price gains based on size and quality differences. The NWMLS does not account for these quality factors which may lead to an apples to oranges comparison.
How Different Are The Numbers?
Funny. The answer is- they are not that different- as you can see below.
Note: July 2007 home price of $481,000 (from NWMLS) was used as the starting point for the Case Shiller line graph and thereafter adjusted monthly by the CS percent increase/decrease.
The Case-Shiller correctly nails the peak of Seattle housing to be July 2007. Since that point- prices for houses have fallen 22.5%.
The NWMLS also pinpoints the peak of the King County market to be July 2007. Since that point, prices in the County for Residential Only (No Condos) has fallen 24.4%.
According to the NWMLS- the March 2009 versus March 2008 price drop was 17.1%.
According to Case-Shiller- the same 12 month price drop was 16.4%.
The March 2009 Median Residential Only Closed Home price was $363,850 for King County. The April 2009 Median Residential Only Closed Home price was $380,000. That is an increase of 4.4%.
We don’t know the Case-Shiller at the time of this writing because it is reported late. The April numbers won’t be available until June.
Real Estate Professionals know that there was a big difference in activity and sentiment between March 2009 and April 2009. I would be willing to wager a Starbucks beverage that May 2009 NWMLS statistics should be strong as well. NWMLS stats for May will arrive in the first week of June. If the Case-Shiller begins to string a successive two-month turn-around- you may be hearing about it in national and local media.
My Conclusions
1) Both house price measures have their strengths and flaws.
2) The biggest weakness of the NWMLS is that it does not compare the same house selling over time.
3) The biggest flaw of the CS is that it is reported late and the data is a bit stale. That could be why the two recent Seattle Times reports conflict.
4) When you see local or national articles addressing home price appreciation or depreciation- check the source of the data before drawing conclusions.
5) Both indices have value and should be studied when analyzing the local housing market.
6) Check to see if they are tracking Seattle only or King County- all properties- excluding condos? etc…makes a difference.
Final Random Thoughts
Robert Shiller wrote a book sitting on my bookshelf called “MacroMarkets”. Robert Shiller is brilliant, but his books will likely never become best-sellers. He is an academic. He does have a passion to see innovative financial products created for the masses. One such product is a sort of hedging derivative with a street name “Home Price Insurance”.
His idea is that an army of realtors and insurance salespeople could sell a product that essentially guarantees that the value of your house will not decrease. Afraid of buying a house right now because you think prices are still falling? No worries- just pay a monthly insurance premium and if your house value falls by $50,000 you qualify for an insurance “claim” of $50,000 and you are made whole. It would necessitate a back-office of Wall Street derivative traders to hedge risk. Guess what index they write derivatives on? Of course, the Case-Shiller index- which can be traded on the Chicago Mercantile Exchange!
I was having dinner with a former banking executive who mentioned that a former co-worker has formed a small company selling home price insurance in California. Homeowners have seen values drop by 50% in some areas and buyers and homeowners with the sting of this memory have an appetite for this product. Interesting.
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