Case-Schiller: a really useless index
May 27, 2008
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The Case-Schiller index is often quated as an evidence that prices are tumbling. Now, this conclusion is dead wrong. There is almost zero correlation between the index and your chances of getting a reasonable price for a house. Why? For two reasons. First, the Case-Schiller is a weighted index. In other words, when a $10M castle gets 1% cheaper, and 100 $100K houses get 1% more expensive, the index thinks that prices are stable. So when the top decile that did get a little frothy corrects, it will produce a dramatic change in the index without necessarily changing things on the ground. The second reason is that the Case-Schiller tries to be a hedonics index that measures quality changes, such as footage. The footage, of course, always grows in time, meaning that C-S countinuously makes housing appear cheaper than it is. This fotage increase, however, cannot be attributed to changing consumer preferences, becuase it's driven almost exclusively by the building departments that prevent developers from listening to the market where the demand is for smaller houses, forcing them to build in the luxury segment only. Now that some of these guargantuan houses are on sale, the index naturally reflects this. However, there is little consolation in this for 90% of buyers, because a discounted McMansion is still a McMansion and still way out of the affordable range. While C-S may be a usefull gauge for the new construction market, it is quite useless for the average buyer. As a bone to the bears, there's no use denying that C-S is down substantially.
"NEW YORK (AP) -- U.S. home prices dropped at the sharpest rate in two decades during the first quarter, a closely watched index showed Tuesday, a somber indication that the housing slump continues to deepen. Standard & Poor's/Case-Shiller said its national home price index fell 14.1 percent in the first quarter compared with a year earlier, the lowest since its inception in 1988. The quarterly index covers all nine U.S. Census divisions. Prices nationwide are at levels not seen since the third quarter of 2004, according to Maureen Maitland, a S&P vice president. However, the index is still up 60 percent versus 2000."
http://biz.yahoo.com/ap/080527/home_prices.html
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