Case-Shiller Decline is steep this month

[Bama Bayou]

Shiller wrote a thesis on the fact markets go too far up, then too far down therefore, the so-called "rational" market did not exist. But even then his methods left something to be desired in 'tight' logic...never fear, overall he is on to something and at least, unlike the NAR it is not being spun with any real expectation that you are supposed to believe it.

I'm not saying it's not useful, just not to me and 90% of the country. If you are in one of the 20 cities they use I can see where it would be. I'm sure that the the way I model my market is much more accurate.

 

[Randolph Kinney]

The Case-Shiller 20 city index actually represents population density. It is not meant to represent rural or small town America. It is where the bulk of the homes are; in the big cities.

So the amount of loans and the housing wealth in this country is in fact adequately represented by the CS index.

 

[George Hatch]

Even if you do live in one of the markets that CS publishes an index for you should still be doing your own modeling. Just as the national medians that are published are meaningless when looking at something on a regional level, a median for a metro market is of little use when looking at something on a neighborhood level. They're indicative of a macro trend but they're nowhere near relevant enough to use beyond that.

 

[Randolph Kinney]

George is right on for application to appraisals. No index was invented to be applied for an individual appraisal assignment.

Even in the San Diego MSA, we have some (damn few) "neighborhoods" that are relatively flat or stable market values. The absolute majority of neighborhoods are declining market values.

However, the CS index for San Diego is a valid measure as to what is happening here on a wide scale. If you are a bank and made loans in 2006 all over the San Diego MSA, you can guess that your portfolio has major losses. If you are a home builder in Carlsbad with unsold inventory today, chances are you will have to seriously drop the prices to compete with the oversupply of housing on the market.

The value of the CS indexes is that you can buy or sell future contracts on specific MSA cities. If you are a builder, you can hedge your exposure by selling the appropriate contract. If values go down, you win, you can offset some of your real losses on homes that you have. If you are a buyer of mortgages, you can hedge the losses you are sustaining from foreclosures.

The value of the CS index is that you don't have to be "right" about a specific house value or specific neighborhood value in the MSA. Another value of the index is that you can track the futures contracts to see where values may be 6 months from now (Wow! a forward looking price indicator).

See the attached graphic of the CS index for San Diego with future contract data. People with real money are betting for more declining values to come.

 

[Metamorphic]

I must say, I'm underwhelmed by the annotation on that graph. I gather the right axis is the index number, but what's the percentage on the right? Are they predicting a 23% decline in values this month? I dont quite get how you can use the numbers on the graph for anything beyond saying "Oohuuu, its double extra bad this month."

 

[Randolph Kinney]

I must say, I'm underwhelmed by the annotation on that graph. I gather the right axis is the index number, but what's the percentage on the right? Are they predicting a 23% decline in values this month? I dont quite get how you can use the numbers on the graph for anything beyond saying "Oohuuu, its double extra bad this month."

The whole graph depicts two graphs; month over month index value and year over year percent change. The right hand scale is the index number, the left hand scale is the percentage change. So looking at the year over year part of the graph for a specific month, you can see the percent change from a year ago month.

Of course you are underwhelmed by things you don't understand. Hopefully the above explanation did not overwhelm your understanding.

 

[Metamorphic]

The should hire you to put a legend or some sort of an explanatory note on their graph. You're better at it than they are. But still, I'm assuming the line graph goes with the right scale, and the bar graph goes with the left scale?

 

[Randolph Kinney]

I must say, I'm underwhelmed by the annotation on that graph. I gather the right axis is the index number, but what's the percentage on the right? Are they predicting a 23% decline in values this month? I dont quite get how you can use the numbers on the graph for anything beyond saying "Oohuuu, its double extra bad this month."

Metamorphic,

That graph may be confusing to understand. I am attaching a graphic image from the S&P site showing April's data in table form. I hope this helps you.

 

[LordofTexas]

Do you think that the people that live in the town of Composite 20 from the above chart were jealous of the people that live in Composite 10 when they named their town?

Grass is always greener, huh?

 

[Randolph Kinney]

The should hire you to put a legend or some sort of an explanatory note on their graph. You're better at it than they are. But still, I'm assuming the line graph goes with the right scale, and the bar graph goes with the left scale?

Thank you for the suggestion.

Yes, the line graph is the index month value plotted and goes with the right hand scale. The line simply connects the dots. You can see a trend. You may not know the percent change month to month with out calculating that from the raw data. It may "look" oooo so bad.

The bar graph is the percent change from a year ago month. You can see if the trend may be accelerating or decelerating. What people want to know, are things getting better or worse. An inflection point (change of slope from positive to negative, or, negative to positive) gives an indication that maybe things are getting worse, or, less bad.

Notice the future contracts are plotted also. Going forward, it looks like maybe there is an inflection point. But, that can change when reality shows up.