Housing Prices with a Dose of Reality

by Houston Agent

The Case-Shiller uses nominal prices from S&P, but it looks quite different when subjected to "real" pricing data.

Standard & Poor’s released the latest Case-Shiller Indices yesterday, and as has been the trend the last few months, the research firm reported declines in price, specifically a 3.9 percent year-over-year drop in the 20-City Composite, which measures home values in the nation’s 20 largest metropolitan areas.

Despite the Case-Shiller’s importance, though, an interesting limitation of its data is that it relies on nominal prices, not the “real” prices that consider inflation and offer a more complete view of any given economic situation.

Thanks to the number crunching by rogue analyst Bill McBride of Calculated Risk, though, we now have a portrait of how “real” home values look.

Real prices are determined by using the Consumer Price Index, or CPI, which measures inflation by tracking the prices of a number of goods and services when compared to a base year. In the case of housing, McBride used the 1999/2000 price levels as the base.

The two graphs, which chart the quarterly Case-Shiller, the aforementioned 20-city composite Case-Shiller, and the CoreLogic home index, are roughly similar in shape; they feature huge increases from January 1997 to January 2006, followed by steep declines to the present day. However, the graphs differ substantially from 2006 to the present day.

McBride’s graph features a lower peak of the 20-composite index at 180, compared to 203 for the nominal graph, but more important, it features a much steeper decline that brings the graph down to 104, far below the 138 of the nominal graph.

Those differences, according to McBride, have particular significance on the historical front.

“In nominal terms, the Case-Shiller National index (SA) is back to Q3 2002 levels, the Case-Shiller Composite 20 Index (SA) is back to January 2003 levels, and the CoreLogic index is back to February 2003,” he wrote. “In real terms, the National index is back to Q4 1998 levels, the Composite 20 index is back to February 2000, and the CoreLogic index back to August 1999. In real terms, all appreciation in the ’00s – and more – is gone.”

A big portion of that additional drop has transpired in the last three years. In the nominal graph, prices rebounded in 2008, and the index has grown mostly sideways every since, though it has fallen from mid-2010 to the present.

In the “real” graph, though, prices experienced a more modest recovery and have dropped more substantially since, and the index is now at 1998/1999 levels, meaning an entire decade of housing gains has been reversed by the downturn when inflation is factored in.

“Real” data has the tendency to seem dire, but as McBride himself has written, not all is lost. Nearly two months ago, he pointed out that the two housing bottoms, one of price and one of sales, construction and investment, were both upon us, and though 2012 may be a year of sideways growth, 2013 would emerge as a positive year.

The one catch involves the Case-Shiller, which operates on a two-month delay, and because of that, will likely be reporting negative pricing data through the spring, though come summer, we very could be looking at a relatively positive index.

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