MY TAKE By Allan Weiss Founder and CEO, Weiss Analytics Beware of Averages
uniquely designed treasures. Some house are on the water while others are near a noisy highway. It’s not surprising that any set of assets with such diversity would all be subject to the same supply and demand shifts that would keep them all dancing together. An alternative and far more predictive way to summarize market conditions is to count up the number of houses rising in value each month in percent terms. During boom times this percent rising index can be close to 100 percent meaning nearly all the houses are rising in value. About 14 months prior to the housing meltdown these indexes began to decline rapidly falling from nearly 100 percent to 40 percent. It is concerning that over the past 18 months the percent of appreciating houses has fallen from around 75 percent to only 55 percent. While an overall downturn in the housing market is not a certainty, that risk appears to be much higher than at any time in the past four years. To maintain a complete picture of the market it is important that we pay attention to summary measures like percent of houses rising in addition to the top line metro market indexes. With a view of numbers at the house level we can more easily understand the immense diversity of assets, people, circumstances, and transactions that we call The Housing Market. Allan Weiss is Founder/CEO of Weiss Analytics, creator of residential real estate indexes and forecasts. He has been awarded several U.S. patents for related financial products. Mr. Weiss is also co-founder and former CEO of Case Shiller Weiss, producer of the S&P Case Shiller Home Price Indexes and forecasts, which were published regularly in The Wall Street Journal. Weiss Analytics is a Natick, Mass.-based residential research firm that provides neighborhood and house-specific value forecasting across the United States. Weiss Analytics has licensed RealtyTrac data for use in their residential research.
Much has been made in the past few days of a report that the Case-Shiller home price indexes indicate accelerating appreciation for the housing market. The overall conclusion implied is that this is occasion for all homeowners, lenders and stakeholders in the housing market to take cheer.
While it’s no fun being the naysayer, as co-founder of Case Shiller Weiss, I feel an obligation to make a few observations at this pivotal time for our economy. Most importantly there are significant misconceptions about what home price indexes measure which are particularly dangerous today given the contrast between the mood these cheery reports engender and the realities for many homeowners, buyers and lenders. Home price indexes like indexes for the stock market are designed to show the average price changes for the many assets in the index, and it is a serious mistake to assume they reflect the price path of any given house or a portfolio of houses. Metro price indexes cover hundreds of thousands or even millions of houses. They cannot possibly be right for all of these houses. Stock market indexes are also averages and are more widely and intuitively understood I believe because people can easily observe the price path of each individual stock. People understand that some industry components and even individual stocks frequently move counter to the index. If you own a large stake in a particular stock and you hear that the Dow Jones is up today you would not assume your stock changed the same amount or even went in the same direction as the index. If we tear off the cover of the top line metro housing indexes and see accurate house level indexes, the price change diversity is astonishing. We see houses even within one town or next to each other sometimesmoving in opposite directions. This is no longer surprising if you remember how diverse the houses and the people that buy and sell them really are. Debunking a False Assumption
There are new and old houses, large and small houses and
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