Trending House Prices

The topic is trending house prices, and specifically, house prices in the Harrisburg marketplace. For blogging purposes I break the topic into three parts:

• How do we trend house prices?

• What is the “best” statistical measure for house prices in the Harrisburg market?

• How have Harrisburg house prices trended since 1993 (as far back as I have data)?

How do we trend house prices?

We understand financial markets through the statistics we employ to track those markets.

Take the Dow Jones Industrial Average (DJIA), which for many people is synonymous with the U.S. stock market. The DJIA is a weighted and scaled average of the stock price of thirty large corporations, the so-called Blue Chips. Considering there are over 3,100 U.S. companies listed on the New York Stock Exchange it is a narrowly defined index. Yet it’s simple and easy-to-understand. Sophisticated research goes into the selection of the companies in the index (only General Electric remains from the original 12 companies Charles Dow included in the index in 1896). Hardcore investors may rely on more complex stock indices; however, for those of us whose primary exposure to the market is our 401K, the DJIA does a good job of tracking the performance of the large-cap sector of the stock market.

It would be nice to have something comparable to the DJIA for the housing market. Given the nature of real estate—housing prices highly dependent on local conditions, no two homes identical, etc.—it’s a tall order.

In mid-80s two Boston-area economists, Karl Case and Robert Shiller, developed an index to measure the change in housing prices using repeat-sales of the same house. I attempted a fuller understanding of Case and Shiller’s statistical methodology, but encountered terms like multivariate regression and heteroscedastic sampling error and figured it wasn’t worth it.

Today the Case-Shiller Index is the gold standard for tracking housing prices. Apparently there are options and futures contracts based on this index, although how they work is a mystery to me. Unfortunately the Case-Shiller Index only covers twenty large U.S. metro areas, of which Harrisburg isn’t one, so it’s of limited value in my marketplace.

The Case-Shiller Index peaked in the 2nd quarter of 2006 and has declined in every successive quarter.

The Federal Housing Finance Agency (FHFA) developed its own housing price index using the repeat-sales method, the FHFA HPI. It collects repeat-sales data exclusively from transactions that are financed by conventional/conforming mortgages purchased by Fannie Mae and Freddie Mac. The FHFA index covers more metro areas than Case-Shiller, including Harrisburg-Carlisle. It doesn’t include home sales that are financed by FHA, VA, and Dept. of Agriculture (rural housing) mortgages. As these government-backed mortgage programs finance a large percentage of home sales today, it limits this index’s usefulness.

So...what if the Case-Shiller Index doesn’t cover your local housing market?  Most likely you must depend on the mean or median price of home sales published by the local multi-list service to track housing prices (in Harrisburg the Central PA Multi-List publishes sales stats quarterly)

The mean and the median attempt to measure the central tendency, or typical value, of a population. Which statistic works better in an application depends on the nature of the population under consideration. In case you don’t remember the definitions…

Arithmetic mean (also known as average)—sum all values in a sample and divide by number of values

Median—the middle value

For a population that resembles the classic Bell Curve, there is little or no difference between the mean and median. In the case of 2009 house prices in the Harrisburg metro area the mean was $180,228 and the median was $161,900. The $18,000 difference between the two measures of central tendency suggests that the distribution of house prices in Harrisburg is skewed towards the upper price range. As it happens the mean is more sensitive to outlying (rare) values than the median. In other words a $1 million house sale may significantly move the mean, but it hardly influences the median.

Integrated Asset Services (IAS), an REO services company, publishes a house price index, the IAS360™, that trends the median price for detached single family house in 360 U.S. counties as well as nationally/regionally. It claims proprietary “next generation” technology, and takes pains to differentiate its methodology from the repeat-sales indices, but doesn’t explain it in great detail (it being, you know, proprietary). Likewise it doesn’t discuss how it selects the 360 counties; presumably population and importance to the REO industry come into play. Its key attribute is speed: it reports monthly with only a 1-month lag.