Guest Post: Debunking Real Estate Myths – Part 1: House Price Indexes

Tyler Durden's picture


Submitted by Ramsey Su via Acting-Man blog,

Real estate bubble, sub-prime mortgages, securitized products and their derivatives were largely responsible for the ultimate collapse, leading us to the economic conditions of today. Policy makers and investors alike were, and still are, basing their actions on a false set of commonly accepted myths.

The first example is provided by the many different House Price Indexes. Borrowing a table from my cyber-friend Calculated Risk, here are the most recent changes in the indexes put together by various different sources:



calculated risk home price summary

House price increases according to a variety of sources


Depending on who one prefers to believe, house prices have appreciated between 5.2% to 13.2% year over year. Case-Shiller is probably the most commonly referenced index today. Their fancy model with a nice interactive chart can be found on the S&P/Case Shiller website. Those who want to engage in a bit of intellectual exercise can read the 48 page explanation of the Case Shiller methodology. A much better read however, is this simple one page overview by FNC that debunks all the house price indexes, including their own. I would like to add that no index takes into account the prevailing interest rate and lending practices, and no-one has figured out a method to make appropriate adjustments. For example, how does one compare a house that sold for $100,000 in 2005 utilizing sub-prime financing, vs. the same house that sold for $70,000 cash in 2013, with a few foreclosures and flips in between? Was $100,000 a meaningful indication of value? Did it really depreciate by 30% in 8 years? Here is the well-known Case-Shiller chart:




CS home price chart

Case Shiller house price indexes – click to enlarge.



Everyone is somewhat familiar with the chart. About the only conclusion I can draw is that easy monetary policy and irresponsible lending practices may lead to a bubble, and bubbles do always burst. It has no predictive value nor does it really tell one much about the past. Gurus may compare today's prices to the sub-prime peak or some imaginary "norm", as if that could offer guidance to policy and investment decisions.

Looking at the Case-Shiller 20 cities composite index simply makes no sense.



20 cities

The 20 cities disaggregated



These twenty cities all have different demographics that change independently from one another over time. What would be the purpose of contemplating these peaks and troughs, especially when combined in an index?

It is baffling that the FOMC supposedly looks at data such as the various House Price Indexes and somehow decides on that basis that buying agency MBS is a good policy. They even figured out that $600 billion was the right amount for QE1 in 2008, and an additional $600 billion was appropriate for QE2 in 2010. Of course with QE3, the Fed determined that $40 billion per month was good for 2013, but $35 billion is better for 2014.

The wisdom of the Fed escapes me at the moment. Maybe it has other, unrelated objectives in mind.

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Fri, 01/03/2014 - 15:23 | 4297336 nope-1004
nope-1004's picture

It's a "flip this house" generation.  Isn't there always a fool around the corner willing to pay you more than you did - cuz you replaced the carpets?

Economic growth = house prices going up, which is a result of either:  A society full of fools, or lending standards falling (easy credit bringing demand forward).  Both don't bode well for future policy.

Fri, 01/03/2014 - 15:27 | 4297367 Popo
Popo's picture

But... But... Da prices always go up, ... Cuz up is da direction dat prices go in.

And if U don't buy now then the prices will be too expensive for everybody real soon... And then no one will buy anything. And then... Oh wait...

Look... Da prices they go up.... Forever okay?

Fri, 01/03/2014 - 17:28 | 4297836 Spungo
Spungo's picture

Da price go up because da interest rates have been dropping since 1980. Just like bonds, the price of real estate and the bond yield are inversely proportional to each other. Families can pay the same $1000/mo regardless of what the interest rate is, so $1000/mo at a low interest rate will have a much larger principal than $1000/mo at a high interest rate.

It's really a shame that economists don't understand this. Bernanke said on TV, before the crash, that he didn't buy the premise that housing prices could fall on a national level. What the fuck does he think interest rates control? Is he retarded?

Fri, 01/03/2014 - 15:33 | 4297398 RockRiver
RockRiver's picture

It's a "flip this house" generation.  Isn't there always a fool around the corner willing to pay you more than you did - cuz you replaced the carpets?


You make it sound so easy....

Fri, 01/03/2014 - 15:35 | 4297403 oddjob
oddjob's picture

The secret is having cookies baking during the open house.

Fri, 01/03/2014 - 15:49 | 4297440 Skateboarder
Skateboarder's picture

"Oh goodness, your house smells so good."

"Yours can too, for the low price of $599,000!"

Fri, 01/03/2014 - 16:03 | 4297523 RaceToTheBottom
RaceToTheBottom's picture

Cookies laced with MaryJane (aka Refer Madness) have been proven to increase both the saleability of the real-estate but also the Cookies.

Sat, 01/04/2014 - 13:15 | 4299848 Canoe Driver
Canoe Driver's picture

It's both. It's a nation of imbeciles who don't care at all what the house is worth, or what it costs, just about the monthly payment. Housing prices therefore always expand, at a minimum, discounting government and bank manipulation, to the point where a 30-year mortgage at prevailing interest rates will consume about half of after-tax median family income, by region. Next stop:50-year mortgages.

Fri, 01/03/2014 - 15:35 | 4297404 Winston Churchill
Winston Churchill's picture

Sarcasm does not suit you.

Remember there are new readers here who are still ignorant.For their benefit;

The privately owned bank cartel , known as the Federal Reserve, is

bailing out its owners by buying toxic waste  at par , with

what will be taxpayers money/and or debt.

Fri, 01/03/2014 - 15:35 | 4297406 moneybots
moneybots's picture

"Debunking Real Estate Myths"


Isn't "everything" a myth, now?

Fri, 01/03/2014 - 15:40 | 4297415 KidHorn
KidHorn's picture

This article is stupid. Why is is so bad to create aggregate data for the entire US?

Fri, 01/03/2014 - 15:47 | 4297434 Skateboarder
Skateboarder's picture

Read the one page FNC summary like the article said to do...

Aggregate data does not take into account demographics, location, changes in the house, mix of properties, etc. Further, the indices are based on current sales, a very volatile indicator of 'value,' to say the least.

Fri, 01/03/2014 - 20:30 | 4298317 bwdiii
bwdiii's picture

You could also aggregate data from Japan, but your results/decisions could  get a little fukushima'ed up.

US currently offers a little less dramatic variation, but that stuff is drifting toward us.

Wonder how the CA RE market will hold up...

Mon, 01/06/2014 - 20:42 | 4306117 radical
radical's picture

KidHorn, aggregate data is an exercise for economists and statisticians, and it should at best be taken as guidance.Furthermore, the 48 pages of description of the Case-Shiller method are like the fine print of a legal contract. Always read the fine print. In the case of any statistical method, the skilled reader will realize the short comings of the methodology.  There are always short comings. Always.

Aggregate means average, and using average data to make very important decisions is highly risky.  And in the case of housing (and other policy areas), the indices are misleading, which can lead to bad legislation, regulation and bad lending decisions.

Aggregate housing data misleads on the health and risk of the market.  Real estate is not national nor is it the same everywhere. Thus the addage, "location, location, location".  Is there any surprise that California, Arizona, and Florida are seeing some of the highest % appreciation, post recession? No, these markets experienced the largest # of mortgage defaults and the largest declines. However, the fast changes in price/value in particular markets also signify that they are the most risky from an investment standpoint. Risky for the property owner and risky for the lender.

Morgage rates are pretty much nationally consistent. However, if housing values in certain areas are inherently more risky (as signified by their price volatility) there is a risk/cost of capital mismatch. In the direction that I'm talking, it means that the asset is over-valued. When many assets are over-valued in a particular niche, this is a bubble. That is exactly the real estate bubble that certain folks are sounding the alarm bells on.

Historically speaking, the Clinton Administration, with Republican House and Senate backing, embarked on a policy to increase home ownership. I think it went from 60 to 64% of households (I will verify the data). Guess what? Increasing this percentage meant lending to higher-risk home owners.  Couple this with increase credit expansion (via credit cards, 2nd mortgages, equity loans, etc), is it any wonder when the inevitable downturn in the economy happend, that defaults soared? No. then add to it that we collateralized the loans, 2nd mortgages etc. to pensions, banks and other entities that did little due diligence on the inherent risk of the underlying security...

Did aggegrate data play any part of the debacle? I'll bet it did.  What else did the buyers of MBOs do to conduct due diligence on the underlying "market" price risk of their security? The mortgages were collated nationally, but what if the tranche had more Cali, AZ, and FL properties than the national average?

As an aside, aggregate data on the Denver Broncos would tell you they are a passing team on offense.  Would you have your defense set up to defend a pass every play? No, the Broncos would likely shred you with the runs and probably shift towards more running.  Back to the article...


Fri, 01/03/2014 - 15:49 | 4297427 Dr. Engali
Dr. Engali's picture

"Real estate bubble, sub-prime mortgages, securitized products and their derivatives were largely responsible for the ultimate collapse, leading us to the economic conditions of today."


This statement is partially correct. When people reflect on the market collapse in 08 they always seem to forget the role that FAS 157 mark to market and mark to fantasy played. In 2006 as part of the planned market take down the FASB issued the accounting standard FAS 157. This forced banks to mark to market their holdings instead of the existing practice of marking them to fantasy since they were holding these securities to maturity. Once the banks had to mark the non-performing garbage to market it became obvious that the banks were insolvent and would have to raise capital. Even after tarp and all the bail outs were passed the markets didn't stablize until this rule was lifted allowing the banks to mark their securities to fantasy again. Once they lifted this rule in 09 the S&P bottomed.

Fri, 01/03/2014 - 16:06 | 4297531 RaceToTheBottom
RaceToTheBottom's picture

Agreed, There is no Accounting any more.

Sun, 01/05/2014 - 02:01 | 4301199 sylviasays
sylviasays's picture

Don't forget that the Community Reinvestment Act led to the housing bubble's lax lending...

Fri, 01/03/2014 - 15:54 | 4297468 screw face
screw face's picture

Hay i got a house for sale in Eugene.....selling for $5,000.00 less than paid in 03, 3bd. 1 bath. $85,000. cash buyer pays closing..... forget about #FUKU we got the Ducks on a winning steak here!!!!!!!

Fri, 01/03/2014 - 16:00 | 4297502 duo
duo's picture

My house in N. Dallas is finally worth more than it sold for in 1986!  I bought it for almost half the 1986 price in 1996.  I'm not looking forward to my property tax bill next year.

Fri, 01/03/2014 - 18:26 | 4297968 Professorlocknload
Professorlocknload's picture

"I'm not looking forward to my property tax bill next year."


  Ah, but the broke municipalities are going to party hardy. Couldn't have worked out better for them if it was planned, or was it?

Fed buying MBS is one thing. Had they been forced to buy all those pension shortfalls directly, might have drawn some scrutiny because many are Union Obligations.

On another note, say, adjusted for Shadow Stats inflation, have home prices really risen that far above 2005 levels in real terms?




Fri, 01/03/2014 - 16:09 | 4297529 MeBizarro
MeBizarro's picture

20 city index shows a lot less noise which is what you would expect by doubling the sample size. More interested to see why there is such a wide disparity between some of the indexes given that they are measuring supposedly the same thing.


Fri, 01/03/2014 - 16:49 | 4297712 MIDTOWN
MIDTOWN's picture

Best of luck convincing an appraiser to factor in that 13.2% annual appreciation.

Fri, 01/03/2014 - 17:02 | 4297763 MIDTOWN
MIDTOWN's picture

Pre 1986 Tax Law the Real Estate investor base was more stable with high income individuals holding for the tax benefits.  Congress and the banks traded this for Government Guaranteed Loans.

Then in 1989 our bought and paid for  Congress eliminated non-qualifying assumable loans thereby forcing nearly all transactions to funnel thru the banks.  Real Estate appreciation is hostage to bank lending & credit policies and has been since 1989.

Fri, 01/03/2014 - 17:41 | 4297871 ArrestBobRubin
ArrestBobRubin's picture

If you want real Real Estate news, put Dave Kranzler's blog on your list:


Fri, 01/03/2014 - 22:52 | 4298660 hooligan2009
hooligan2009's picture

lending money against depreciated assets (houses) where the mortgage borrower has a good credit history is about the safest investment you can get, especially compared to a society that elects a government that is corrupt and is otherwise creating mountains of debt that impoverish multiple generations of least the ones paying the mortgages are reducing the amount of debt that they owe.

the sad thing is, no matter how a mortgagee behaves by responsbily paying back what was borrowed, they will still be side swiped by a profligate government that they themselves elected to beggar their futures.

the pile of the brown stuff wont stop smelling until the people elect a government that runs surpluses, not deficits.

Tue, 01/21/2014 - 02:04 | 4350732 shawnmike
shawnmike's picture

lending money against depreciated assets (houses) where the mortgage borrower has a good credit history is about the safest investment you can get, especially compared to a society that elects a government that is corrupt and is otherwise creating mountains of debt that impoverish multiple generations of least the ones paying the mortgages are reducing the amount of debt that they owe.

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