According to the most recent Case-Shiller report, home prices in the San Francisco Metropolitan Area were up 18.3% from May 2009 to May 2010. On average, national home prices were up an 5% during this stretch…so why did the Bay Area’s home prices go up so much more?
Or did they?
Check out this chart from the Wall Street Journal. The San Francisco MSA showed by far and away the biggest price gains of in the country.
More Than a Changing Mix
But are real home prices really 18.3% higher than a year ago? It certainly doesn’t pass my sniff test.
First, know that Case-Shiller does NOT measure the median price, which can easily be distorted by a changing mix of sales. Instead, they focus on repeat sales of the same property:
To calculate the indices, data are collected on transactions of all residential properties during the months in question. The main variable used for index calculation is the price change between two arms-length sales of the same single-family home.
For each home sale transaction, a search is conducted to find information regarding any previous sale for the same home. If an earlier transaction is found, the two transactions are paired and are considered a “repeat sale.” Sales pairs are designed to yield the price change for the same house, while holding the quality and size of each house constant.
Each sales pair is aggregated with all other sales pairs found in a particular MSA to create the MSA-level index. The 10 and 20 Metro Area Indices are then combined, using a market-weighted average, to create the Composite of 10 and the Composite of 20.
For more detail, Case-Shiller also breaks down each MSA into price tiers and tracks the performance of the top, bottom, and middle thirds. One would think that these tiers would reflect the 18.3% boost, but, strangely, they don’t.
By my calculations, the lower third has appreciated by 14.9%, the middle third by 12.8% and the top third by just 8.3%.
These numbers certainly seem more believable (at the lower tier anyway).
But, if no segment of homes even appreciated by 15%, how can the index say that the MSA appreciated by 18.3%?
Case-Shiller Breaks Down
Clearly, there are fundamental flaws with the Case-Shiller formulas…but it’s beyond me to try and fix them.
Here’s a sample:
Case-Shiller gives extra weight to sales where the exact home was sold before. They use all kinds of adjustments and tweaks to try and account for overly-improved or trashed homes.
Consider that the AVERAGE price level of the 3 tiers in May of 2009 was 124.97, while the aggregate reads 120.79. Clearly, the aggregate is giving extra weight to the lower tiers.
In May 2010, the AVERAGE price level of the 3 tiers is 139.67, yet the aggregate reads 142.99. Clearly now, the aggregate is giving extra weight to higher-priced sales.
In 2010, the weighting metrics are favoring higher-priced homes as “better” comps…but why?
My Sniff Test
I would accept that the home prices for the lower third have come up anywhere from 15-20% in the past year. A reduced supply of foreclosures for sale and increased demand with tax credits and low interest rates have lead to bidding wars.
I would also believe that home prices for the middle third of Bay Area homes appreciated by 10%, pushed up by the same forces.
However, I find it harder to believe that higher-end Bay Area homes have appreciated by 8.3%. I don’t even think you’ll find many optimistic homeowners who would be so bold. In the 600s-700s, maybe there has been a little appreciation. But prices have been flat to down slightly up to 1M. Much over that, and prices have most certainly declined.