Friday, May 2, 2008

Is the Sky Really Falling?

For some reason, the media love to try to make the state of the housing market sound a lot worse than it is. For example, on Tuesday, the S & P/Case-Shiller Home Price Index reported a 12.7% decline in home prices from February 2007 to February 2008. This was the largest drop in the index since its creation in 2001. So what? That's only seven years of data, during what was mostly a boom market. And this index only follows 20 major cities, many of which--Los Angeles, San Francisco, San Diego, Las Vegas, Phoenix and Miami--saw the biggest run up in prices and now are experiencing the biggest declines. Despite that index's limited seven-year history and limited geographic coverage, the Associated Press reported that home prices "plunged by a record" percentage and "at their fastest rate ever."

The S & P/Shiller-Case Home Price Index only looks at single family house prices (not condos, townhouses, new construction or mobile homes), and it only considers houses that have sold more than once. I can't figure out from their methodology if they are looking at average or median price, and I don't know how far back they look for a previous sale.

Let's suppose they are looking at the average sale price. In Tucson, the average sale price of single family residences increased from $275,563 in February 2007 to $289,991 in Febuary 2008. This is a 5.2% increase in the period evaluated by S & P/Shiller Case Home Price Index. In Tucson, the average price of all properties, including townhouses, condos, etc., increased 1% during that 12 month period.

It should be clear to anyone that the average temperature across the country, or in 20 major cities, tells us nothing about the actual temperature in Tucson. Even within Tucson, the climate varies from one neighborhood to the next. Just as climate is local, so is real estate.

For an explanation of how the S & P/Shiller-Case Home Price Index distorts reality, see MarketWatch.

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