Headlines are warning of a double dip recession in the housing market, but who is providing the data to back up these claims?
The S&P/Case Schiller Index was released this week with dramatic reports of 8 straight months of falling prices. What exactly is this index that reporters around the globe are frantically quoting?
1) It samples only 20 of the largest, most volatile U.S. cities
2) Of those cities, only a small sampling of property data is used
3) The same small sampling of properties are used in each report
4) It does not include condos, new homes or town homes.
5) The data includes subprime mortgages
More importantly, who are the guys who publish this data and why do they do it?
Karl Case was a Wellesley College economics professor and Robert Shiller was a Yale economist when they began to design a way to measure housing price movements in the 80‘s.
Shiller also co-founded Macromarkets LLC with Sam Masucci, who spent 15 years on Wall Street in senior management for companies like Bear Stearns and Merrill Lynch.
Macromarkets LLC is a hedge fund that bets on home prices. The company announced in May that they are managing more than $1 billion in assets.
One could say that the S&P/Case Shiller Index is really just Wall Street marketing at its best. After all, it certainly would be in the interest of the fund for future home prices to look bleak.
National Association of Realtors (NAR) chief economist Lawrence Yun called S&P/Case-Shiller a “total distortion of market conditions based on a small selection of falling local metro coverage.”
However, Yun’s NAR index is also under attack for faulty reporting. Their data is based purely on Multiple Listing Service data from 156 Metro Statistical Areas (MSAs).
Here’s why the NAR index may not be an accurate depiction of what’s going on in the market:
1) It lumps all price ranges together and treats all homes equally
2) It does not include new homes or repeat sales
3) It does not include jumbo loans, skewing data lower in coastal markets
4) It does not include foreclosures, skewing data higher in distressed markets
5) It reflects median prices, not average. (If 10 properties sell, the median price would be property #5)
6) The data is presented by an organization with a vested interest in making real estate look good.
Real estate cannot be traded like a commodity on Wall Street. It also can’t be lumped into a city, state or national statistic.
Real estate is tied to land and therefore must be valued by its location and use. Each street, each corner, and each lot has a different value. Just ask the guy who lives in a little house across the street from the big house with a view. He’ll tell you home prices can’t be averaged.
Where can the average American get useful data to help with real estate buying or selling decisions?
Get local sales comparables. You must understand what’s happening at the neighborhood level. You can find lots of neighborhoods with price increases even in metro areas showing overall price declines,
A local expert can help you. Ask for a list of sales figures for the neighborhood and compare recent sales with historical data.
If you are looking to buy your primary residence and plan to stay a long time, your biggest concern should be whether you love the home and can truly afford the payment, including future repairs.
If its cheaper to lease or you plan to stay only a few years, it may be wiser to rent. Selling costs are just too high to move in and out of property quickly - unless you improve the value to over 10% of what you paid.
If you are looking to buy an investment property, focus on the monthly yield. Figure out the monthly cash-flow you will receive from leasing the property vs. how much money you put in it. This will give you your cash-on-cash return. Anything less than 9% these days is probably not worth your time and money.
Be cautious of any investment that is dependent only on future appreciation, like land. If the property isn’t paying you monthly, you are losing over 9% every year. That loss must be calculated in the ROI.
Kathy Fettke is the CEO of www.RealWealthNetwork.com, an educational resource for new and experienced real estate investors.
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