If you’re at your computer to read this, then odds are you’ve already seen that Fortune magazine has put us as number ten in the 10 Worst Real-estate Markets of 2009. What you probably haven’t seen is anything resembling some informed analysis – everyone is just bandying about that “experts say.” What experts? Based on what? What the hell does that mean, anyway?
Let’s try to take a slightly more detailed look, shall we?
Put aside the projections for the moment and let’s look at where this “median house price” comes from. The very first question I had when I saw this article was “exactly what do they call the Washington DC area anyway? That could mean a lot of things.” Since these numbers are based on of Standard & Poor’s Case-Shiller Index[pdf] it’s easily answered. The preceding link is a two-page tearsheet explaining what the S&P CS is, but there’s a more detailed explanation of the Case-Shiller methodology available as well[pdf]. We’ll talk a little more about that in a second, but for now here’s the list of areas examined:
- District of Columbia DC
- Calvert MD
- Charles MD
- Frederick MD
- Montgomery MD
- Prince Georges MD
- Alexandria City VA
- Arlington VA
- Clarke VA
- Fairfax VA
- Fairfax City VA
- Falls Church City VA
- Fauquier VA
- Fredericksburg City VA
- Loudoun VA
- Manassas City VA
- Manassas Park City VA
- Prince William VA
- Spotsylvania VA
- Stafford VA
- Warren VA
- Jefferson WV
For a graphical look, I’ve plotted the locations on a Google map (note: I have not entirely sanity checked it).
The Case-Shiller is a valuable tool, but it’s worth pointing out that any predictions based on the New York, Chicago, and Washington DC areas are going to reflect the fact that it – in the words of the index managers themselves – “represents a customized metro area that measures single-family home values in select … counties with significant populations that commonly commute” to those areas for work purposes. This index covers a pretty big stretch, so don’t assume that your dream house down the road is going to fall by 20% next year if those predictions are right.
On the other hand, remember that if the predictions are right that means the average price will fall 20%, meaning that if some fall less then some are going to fall more.
You can actually see a plot of the SPCS index for our area over at Bloomberg.com, and it has made it way back now to the mid-2004 number.
That’s great as far as past information goes, but anyone who bought a house or stock recently can tell you that “past performance does not guarantee future results.” So who are the ‘experts’ and what do they base it on?
It’s not obvious from the Fortune article, but if you look down at the fine print they cite two sources: the National Association of Realtors and Moody’s Economy.com. Economy.com is the source here, and if you track down their products page you’ll find this description of their Case-Shiller indexes.
Moody’s Economy.com‘s fully specified equilibrium model, based on Case-Shiller Home Price Indexes (CSI), forecasts single-family home prices and identifies long-term influences on prices such as income trends and demographics, and cyclical factors such as joblessness and changes in mortgage rates.
Don’t take this as disparagement of what they provide, but I will point out this line from the following paragraph. “CSI are recognized as the most trustworthy and authoritative home price change measures available.” Two important things to take from this: one, “most trustworthy” is a comparative measure, not an absolute one. Somebody was the tallest midget in the Wizard of Oz but that doesn’t mean you’d ask him to change a lightbulb for you. Two, we’re in an economic time that doesn’t have a precedent since the Case-Shiller was created about thirty years ago, so this might not be an effective model in our current times.
Of course if the model is bad that doesn’t mean their predictions are too pessimistic. A broken instrument can’t be counted on, but that’s the only conclusion you can take from it. Those numbers could be overly optimistic.
The most important thing, though, is this: don’t just consume these soundbytes uncritically. I hope this helped with that a little bit.