Are Bay Area Home Prices Really Up 18 Percent?

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.

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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.

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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. icon smile Are Bay Area Home Prices Really Up 18 Percent?

Here’s a sample:

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7 27 2010 1 54 03 PM Are Bay Area Home Prices Really Up 18 Percent?

7 27 2010 1 54 20 PM Are Bay Area Home Prices Really Up 18 Percent?

Improper Weighting?

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?

Is it possible that the extreme home improvement and the extreme foreclosures in the Bay Area are skewing Case-Shiller’s numbers?

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.

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12 thoughts on “Are Bay Area Home Prices Really Up 18 Percent?

  1. Ed

    If Case Shiller tracks pair sales, then there would be heavier weight given to a cash investor buying at a lower price (10 day type close, which banks love), and immediately reselling for 20% more. I see a lot of that in the distressed areas. So part of the 18% appreciation can be the difference between cash up front price and normally financed purchase price.

  2. Steve

    Have to agree with Ed. Lots of investors buying REO’s that have been languishing for years ridiculously overpriced while the owner (bank?) finally comes to its senses and prices correctly. The investor slaps some lipstick on the pig and puts her on the street. The spread between investor purchase and sell is probably much more than 18% but it is offset by house selling at record lows.

  3. Greg Fielding

    I would think so too, except Case-Shiller specifically tosses out comps where the house was obviously flipped.

    Besides, if this was rampant at the low end, you would expect the lower tier to show appreciation above 18%.

    This still doesn’t explain how the aggregate total is so much more than any of the tiers that make it up.

  4. corntrollio

    “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?”

    One thing that’s worth noting is that the tiers are based on the first sale, not the subsequent sale. So if a house last sold in 1995, you’re using that price to set the tiers. As an addition factor, Case-Shiller weights recent sales more heavily because even though Case-Shiller removes obvious renovations, it misses a few, and it’s more likely that an older sale has been renovated.

    If you combine these two factors, a 2005 first sale would likely be at a higher price than a 1995 first sale, AND the 2005 first sale would be more likely to be in a higher tier than the 1995 first sale. Then, in the weighting process, the 2005 first sale would be weighted higher for being more recent. When you combine these two factors, you probably account for why the higher tiers are exerting more influence right now.

    As to the lower tiers exerting more influence before, it’s worth noting that in late 2008 and much of 2009, not much of the high end was moving very much. So lower tier sales in outerlying areas exerted undue influence on the index.

  5. A. Lewis

    I agree there are some mysteries with Case-Shiller, but it’s still so much more useful than the median-home prices out of CAR/NAR.

    I only focus on the tiered data myself. If you look at long-term charts, though, the Aggregate does seem to sit quite well inside the tiers data – usually near the middle tier. So whatever wackiness they have in weighting for the average, seems to come out in the wash in the past…

    One thing about it passing your sniff test is that the SF MSA is an awfully large place, and the best neighborhoods are only a small piece of the pie – so what happens in large communities with a lot of turnover like Antioch is much more important than a small town like Alamo.

    So I think many of us watch ‘good’ neighborhoods which are pretty far off the SF MSA average. And although we know what’s happening in ‘bad’ neighborhoods, we might weight, in our minds, two cities equally (or even unweight the ‘bad’ neighborhood), whereas C-S will be using sales volume as the base-weight – so 100 sales in Hercules matter 10 times as much as 10 sales in Orinda.

    To me, the value in C-S is saying what the larger market is up to in the SF MSA, and then you have to think ‘how far can my special neighborhood deviate from this average?’ ‘how much more (or less) are people willing to pay to live here vs. Antioch, or the middle of Oakland?’. Because if prices fell 40% in a ‘bad’ neighborhood that’s not too far away, that WILL affect the good neighborhoods, despite dreaming homeowner’s passionate denials that they are too special.

    So there are always going to be differences between local observation and C-S aggregated numbers, but they ought to be explainable.

    By the way, I recommend using the Not-Seasonally Adjusted data. I want to know the seasonality – I’m smart enough to understand it and not misinterpret it, and all Seasonal-Adjustments are prone to error, especially during market volatilty.

    Love your site – more East Bay detailed commentary is ambrosia!

  6. Squirrel

    “In the 600s-700s, maybe there has been a little appreciation. But prices have been flat to down slightly up to 1M.”

    Therein lies the problem. Case Shiller’s definition of “high end” is much lower than what you and I (and many other bloggers) consider high end. Like it or not, the 500-700K segment of homes is much bigger than the 6-700K segment and the 1M segment combined. What we are seeing is gains on the low part of the high end are carrying the day and the stagnation, to possibly slight downturn you and I see in our definition of “high end” is going undetected.

  7. Greg Fielding

    “downturn you and I see in our definition of “high end” is going undetected.”

    Or simply not having much of an impact on the aggregate because there have only been a handful of 1M+ sales.

  8. Mike


    I highly doubt that there is anything wrong with the Case Shiller index. I think it may be in the way you are interpreting the breakdown by tiers.

    The aggregate does calculate out to 18.3% YOY. And what is causing the disperaity you see is probably the mix of housing between the tiers. If you look at the Aggregate index in 09 its closer to bottom tier index. Probably showing that most of the homes sold in 09 were low cost homes.

    In 2010 they are a bit (although very small) closer to the middle tier, signaling that more mid tier homes have been selling. This might explain why the aggregate figure goes up.

    The aggregate is just the summation of all the homes. So if the mix trends more towards middle or upper end homes your aggregate is going to go up more.

    Trust me, I definitely believe that there are some in the real estate field that would like to put a rosy lens on real estate trends. But I don’t believe that Schiller is one of them.

  9. Greg Fielding

    Mike, I agree that Shiller isn’t trying to put a positive spin on anything and I don’t think the index is necessarily broken. Instead, I wonder if the one-size-fits-all formulas produce more erratic results in the Bay Area with our unique mix of high prices and rampant foreclosures.

    You said “So if the mix trends more towards middle or upper end homes your aggregate is going to go up more. ” and I’m not sure this is the case. If the index tracked the median sales price, then you would be correct. Here, Case-Shiller tracks repeat sales. So, even if the mix trends towards higher price ranges, sales in those higher ranges could still be trending down.

    I’d be interested to hear his explaination.

    Regardless of why, it still doesn’t sit well that the entire MSA goes up by 18% while each tier improves by much less.

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