Things Aren’t Always As They Appear

We’ve all read recent reports on the U.S. real estate market, which appears to show great strength.  In fact, yesterday it was reported that The S&P CoreLogic CaseShiller Home Price Index for January increased by 5.7% year over year for the 20-city composite index.   On the surface that sounds quite positive.  However, I have a friend who is one of the country’s leading real estate analysts, who has been complaining about the current state of the U.S. real estate market.

However, I have a friend, Keith Jurow, who is one of the country’s leading real estate analysts, who has been relaying his concerns to me about the current state of the U.S. real estate market.  What in the numbers scare him?  As it turns out, it isn’t what is being reported, but what isn’t.  Keith feels that the index doesn’t appropriately capture the true economics of our market.

Given this concern, I asked him to write an article for the KCS Blog, which follows.  I hope that you find his insights useful – I certainly have.

Why the Case-Shiller Index Distorts Home Price Gains by Keith Jurow

For many years, the Case-Shiller Index has mesmerized pundits and Wall Street alike. It is the undisputed gold standard for assessing housing market price changes and its credibility has remained unchallenged. Who doesn’t believe that this Index truly depicts what is happening in major housing markets around the country?

Its former publisher — Standard & Poors – actually put out a 41-page explanation of the methodology behind the Index upon which this analysis is based.

The index uses what is known as a “repeat sales” model because it takes recent home sales and matches them with a previous sale of that same property. It is essential for you to understand that at the foundation of the index are certain key assumptions. The most important is that different weighting is assigned to matched pairs of home sales depending on certain criteria.

Paired sales are assigned a weight anywhere from zero to one depending on how far the pair differs from the “average price change for the entire market.” The purpose of this is to “smooth out” distortions which the Index creators believe are caused by extreme price changes that differ markedly from most of the other price changes in a given metro.

Here is an even more important weighting factor. A home which has a longer time interval between its two paired sales is given considerably less weight than one where the interval is much shorter. For example, a home in which the interval between sales is 10 years may be assigned a weight equal to only 80% of a paired sale with a six-month interval. An even longer time between paired sales could be given a weighting as low as 55%.

The S & P explanation describes the assumption behind the weighting given to different time intervals this way: “Over longer time intervals, the price changes for individual homes are more likely caused by non-market factors” (i.e., physical changes in the property such as a room addition).

As a result of this assumption, the paired sale of a house in any metro which composes the Index can be given a weighting significantly different from other paired sales in that metro.

Why is this assumption built into the Index? A sale is a sale, isn’t it? Shouldn’t all home sales be given the same weighting in compiling the Index? Apparently not, according to the economists who created this Index.

Why does this matter? The very different weighting of paired sales necessarily causes the index to grossly distort the raw sales data. To put it differently, the Case-Shiller Index is in no way an accurate measurement of what price changes are occurring in any major housing market of which the Index is composed.

Let me be crystal clear. The only way to get an accurate picture of any housing market is to take houses recently sold where there is data on the previous sale of that house. Then you can measure the actual gain or loss on that property over the specific time period between sales.

No index does this. The closest attempt actually made was a US Home Sales Report put out by RealtyTrac in April 2016. I wrote a detailed article on this a year ago. Let me explain briefly.

The report took 125 major metros which had at least 300 home sales each in March 2016 where they also had data on the previous sale of that home. The compilers of the report took an average of the net gain (or loss) for all the home sales in that metro. These were not annual price increases but gross gains over the entire period of ownership. For all the metros, homes were held for an average of 7 ½ years. The median gross profit (excluding sales commissions) for all these metros was 16%. After deducting the commission, the average net profit was barely 10%. Thirty metros had gross profits of between 1% and 10%.

For an average holding period of 7 ½ years, this average gross profit is really terrible. The property owners would have been better off with a portfolio of high-quality corporate bonds during that period.

In 15% of these markets, there was actually a loss for those who sold in March 2016. This included major metros such as Chicago, Cleveland, Milwaukee, and Birmingham. Take a look at this table showing the major metros with the highest and lowest price gains.

There is a reason why the top three markets are all in California. More than 40% of all outstanding bubble era non-prime loans have been modified. This percentage has steadily risen from only 17% in early 2011 and continues to increase.

Why is this important to know? Because so many delinquent bubble-era mortgages in California were brought current by these modifications, foreclosures have completely collapsed – from a peak of 30,000 in August 2008 to slightly more than 1,000 in December 2016. Had these seriously delinquent mortgages been foreclosed instead of modified, that would have dumped hundreds of thousands of properties onto the market at distressed prices. Because this did not occur, median sale prices, as well as the Case-Shiller Index for metros such as Los Angeles, have been artificially inflated.


When you re-read the latest Case-Shiller report, keep what I have explained in mind. Its distortions tell you very little about what is occurring in these major metros. To understand the reality of housing markets and where they are headed, following my upcoming articles might be a good place to start.

Keith Jurow is one of the nation’s leading real estate analysts. Many of his in-depth articles can be found at his website,


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