The Central PA Multi-List (CPML) recently published year-end statistics for residential sales. As is often the case the statistics are somewhat contradictory. On the one hand there is good news: based on average sale price, housing appreciated 1.85% in 2010. The previous year it had depreciated 3.75%. On the other hand sales volume decreased about $132,000,000 (or 10%) and average days-on-market drifted steadily upwards to 102 days in the 4th quarter, the highest number since I started selling real estate in 1995.
From the 2nd quarter to the 3rd quarter the number of homes sold dropped 732 units. This represents a 30% change. Normally about the same number of units sell in the 2nd as the 3rd quarter. With a high degree of confidence we can attribute this abrupt slowdown to the end of the federal government’s homebuyer tax credit program on June 30th. This took away a big incentive for 1st-time buyers; much of the subsequent drop in housing sales occurred in the under-$200,000 market.
Based on the last half of the year about 485 homes are sold each month in the Harrisburg metro area. At year’s end there were 4,502 homes on the market, representing a 9-month supply of homes. A 6-month supply is generally considered a neutral market, i.e., not favoring buyers or sellers.
Already low at the start of 2010, mortgage rates trended lower throughout the year, bottoming out at 4.25% in November. Low rates help all homebuyers: arguably they provide a bigger incentive for high-end buyers than low-end buyers. This is borne out by the numbers. For the year the number of units sold above $300,000 increased 8.4%, while the number of units sold below $300,000 dropped 14%.
The 1.85% increase in the average sale price is somewhat illusory as all the other sales statistics suggest a weak, possibly declining, housing market. According to the Wall Street Journal (“Home Prices Sink Further,” January 31, 2011), citing market research by Zillow.com, declining markets are the norm in cities across the country. Home prices in Philadelphia reportedly fell 8.8% this past year.
In a declining market buyers and sellers often fail to come to terms. Homes just sit on the market or discouraged sellers pull them off the market. So rather than focus on average sale price in central PA, a better gauge is probably home inventory and days-on-market. When these numbers start to drop it likely signals a true change in market direction.
Bottom line: the Harrisburg housing market is still in the doldrums, where it has been since housing prices peaked in 2007.
Monday, January 31, 2011
Wednesday, January 5, 2011
Belated New Year's Welcome Plus Dire Warning
I recently acquired a smartphone. Apparently I am now among the roughly 28% of Americans who own such devices. These things are technologic wonders. However there’s a dark side. With the advent of smartphones and tablet PCs we now connect to the Internet any time & any place. At the same time these devices allow developers of web sites, games, apps, and anything else you connect to or download from the Internet, to track what you look at, purchase, and post online.
The Wall Street Journal published a series this past year, titled “What They Know,” that dissects the Internet tracking industry. Suffice it to say, there’s a technology war going on as tracking companies devise ever more sophisticated ways to gather personal information and sell it on the open market. If you’re an Internet user, there’s a good chance a tracking company has already created your virtual profile, to include age, gender, ethnicity, income, home ownership, politics, and parental status. The company may also have “scraped” and “mined” data that suggests your sexual preference, your smoking habits, whether you’re dieting, suffering from depression, or trying to get pregnant. From the GPS functionality on your smartphone it knows your physical location. In short, today’s tracking companies know more about you than your best friend.
What’s also clear is that all this information is anonymous in name only. Smartphones, for instance, transmit unique identifiers that tracking companies associate with your consumer profile. Online data can be combined with public offline data to effectively “de-anonymize” a profile. [Tracking companies generally insist that they either don’t do this or see no need to do this.]
It’s all driven by money. Businesses and search engines want to target ads to their most likely customers and they’re willing to pay top dollar for the information to do this. The more complete your online profile, the higher the selling price, so trackers are motivated to develop technology that is increasingly intrusive.
What’s more devious, and apparently common practice, is a business, say an insurance or credit card company, using online profiles to decide whether you’re the right kind of customer. Something “wrong” in your profile, maybe you never see the best credit card or life insurance offer. [This sounds suspiciously like "steering," a practice verboten in the real estate industry]
Jack Shafer, writing in online Slate magazine ("Want Web Privacy? Pay For It"), argues that we have entered into a devil’s bargain when we demand free Internet services and content: the cost of free Internet is loss of privacy. Given that I enjoy the (largely) free Pandora online radio, network via Facebook, use Google’s free Blogger blog hosting service, and employ Google or Bing to search the web every day, Shaffer suggests I better not get my knickers in a twist when ads targeting my particular demographic—white, male, 50-something, married, etc—magically show up on my web search pages.
OK, I’ll accept Shafer’s argument to a point; but many of the practices discussed in the Wall Street Journal articles would be called espionage in another context. What’s the solution? The first step is public awareness that these private Big Brothers are cataloging our daily lives. Then we need to draw a legal line between legitimate market research and spying.
Monday, May 31, 2010
How I Screwed Up My Radon Test
OK, I’m stupid.
Here are the details. I dutifully followed the directions (mostly) on the Pro-Lab radon testing kit. I placed the two detector-vials on a flat surface in my basement, more than 2 feet above floor and 3 feet away from walls. After the prescribed 96-hour testing period, I capped the detectors, and then carefully put them in my desk drawer for later mailing to Pro-Lab. The latter action was my screw up. I should have immediately mailed them to Pro-Lab for reading. By sticking the detectors in my desk I demonstrated a fundamental misunderstanding of the nature of the thing I was testing for.
This is as good an entree as any to the properties of radon.
As every real estate agent has heard repeatedly, radon is a colorless, odorless, naturally-occurring gas. It is the heaviest of the noble gases, which are a group of elements that don’t easily react with other elements. Helium, neon, and argon are the better known noble gases that we encounter in our daily lives. Radon is also radioactive. It is this property in combination with its inertness as a noble gas that makes it such a troublemaker.
Naturally occurring uranium in the ground is the ultimate source of radon. Uranium-238, the most common isotope, is weakly radioactive. Over the course of time—a long time—it decays to lead-206. I say “a long time” because uranium-238’s half-life, or the time it takes half the radioactive atoms in a sample to decay, is 4.5 billion years. By the way the much rarer isotope, uranium-235, in a highly enriched form, was the explosive (fissile) material for the “Little Boy” atomic bomb dropped on Hiroshima.
As you can see on the chart above, the chain of radioactive decay from uranium-238 to lead-206, a process known as transmutation, is quite long. Radon sits in the middle, more or less. Under normal conditions the elements above radon in this chain are solids, and, as such, stays fixed in the soil. However, when radium-226 decays to radon-222 things change. Radon, as reported above, is a gas, and, more specifically, a noble gas, a gas that doesn’t chemically interact (or bond) easily. It’s a free spirit, so to speak, and migrates to the earth’s surface through pores in rock/soil and ground water. For reasons I will delve into later, radon tends to concentrate in the basement levels of buildings.
Radon is highly radioactive. Its half-life is 3.8 days. It decays by emitting an alpha particle to become polonium-218. Polonium-218 decays in similar fashion to lead-214 (radioactive). Lead-214 emits a beta particle to form bismuth-214, et cetera. Each of the successive progeny of radon emits either an alpha or beta particle as the decay chain continues towards lead-206. Both types of radiation pose health hazards.
If radon was the last stage before non-radioactive lead-206, it probably wouldn’t pose a serious environmental issue. Although we might inhale it, we would likely exhale it in the next breath. In any case the next element in the decay chain would be the non-radioactive lead-206. While lead is an environmental hazard, the concentration we’re talking about here is extremely small and wouldn’t by itself create much of a hazard (lead from old paint is a completely different story).
But radon isn’t the penultimate decay stage. The elements it transmutes into are chemically reactive solids as opposed to inert gases. Polonium-218, lead-214, bismuth-210, and the rest of the radioactive progeny, are likely to attach themselves to dust particles and tobacco smoke, which, in turn, become lodged in lung tissue, where radioactive emissions in the form of alpha and beta particles can do real damage.
Now back to my original act of gross stupidity...the purpose of the detector-vials that I left open for 96 hours in my basement was to collect a representative sample of radon, whose radioactivity then has to be measured by a lab. Problem is the radon within the capped detector-vials doesn’t stay “radon.” It decays into polonium, lead, bismuth, etc., each of which has its own characteristic half-life, so when the lab measures radioactivity a few days after the vials are capped and mailed, it actually measures the radioactivity of the mixture of elements created by radon’s decay, each of whose concentration is constantly changing. Obviously there’s a time relationship between radioactivity and the original radon concentration, but I suspect the longer you wait, the more sources of error creep into the reading. As it costs $30 to read my radon test, I will opt to repeat it rather than risk a bad reading because I delayed shipping the test vials to the lab.
Here are the details. I dutifully followed the directions (mostly) on the Pro-Lab radon testing kit. I placed the two detector-vials on a flat surface in my basement, more than 2 feet above floor and 3 feet away from walls. After the prescribed 96-hour testing period, I capped the detectors, and then carefully put them in my desk drawer for later mailing to Pro-Lab. The latter action was my screw up. I should have immediately mailed them to Pro-Lab for reading. By sticking the detectors in my desk I demonstrated a fundamental misunderstanding of the nature of the thing I was testing for.
This is as good an entree as any to the properties of radon.
As every real estate agent has heard repeatedly, radon is a colorless, odorless, naturally-occurring gas. It is the heaviest of the noble gases, which are a group of elements that don’t easily react with other elements. Helium, neon, and argon are the better known noble gases that we encounter in our daily lives. Radon is also radioactive. It is this property in combination with its inertness as a noble gas that makes it such a troublemaker.
Naturally occurring uranium in the ground is the ultimate source of radon. Uranium-238, the most common isotope, is weakly radioactive. Over the course of time—a long time—it decays to lead-206. I say “a long time” because uranium-238’s half-life, or the time it takes half the radioactive atoms in a sample to decay, is 4.5 billion years. By the way the much rarer isotope, uranium-235, in a highly enriched form, was the explosive (fissile) material for the “Little Boy” atomic bomb dropped on Hiroshima.
As you can see on the chart above, the chain of radioactive decay from uranium-238 to lead-206, a process known as transmutation, is quite long. Radon sits in the middle, more or less. Under normal conditions the elements above radon in this chain are solids, and, as such, stays fixed in the soil. However, when radium-226 decays to radon-222 things change. Radon, as reported above, is a gas, and, more specifically, a noble gas, a gas that doesn’t chemically interact (or bond) easily. It’s a free spirit, so to speak, and migrates to the earth’s surface through pores in rock/soil and ground water. For reasons I will delve into later, radon tends to concentrate in the basement levels of buildings.
Radon is highly radioactive. Its half-life is 3.8 days. It decays by emitting an alpha particle to become polonium-218. Polonium-218 decays in similar fashion to lead-214 (radioactive). Lead-214 emits a beta particle to form bismuth-214, et cetera. Each of the successive progeny of radon emits either an alpha or beta particle as the decay chain continues towards lead-206. Both types of radiation pose health hazards.
If radon was the last stage before non-radioactive lead-206, it probably wouldn’t pose a serious environmental issue. Although we might inhale it, we would likely exhale it in the next breath. In any case the next element in the decay chain would be the non-radioactive lead-206. While lead is an environmental hazard, the concentration we’re talking about here is extremely small and wouldn’t by itself create much of a hazard (lead from old paint is a completely different story).
But radon isn’t the penultimate decay stage. The elements it transmutes into are chemically reactive solids as opposed to inert gases. Polonium-218, lead-214, bismuth-210, and the rest of the radioactive progeny, are likely to attach themselves to dust particles and tobacco smoke, which, in turn, become lodged in lung tissue, where radioactive emissions in the form of alpha and beta particles can do real damage.
Now back to my original act of gross stupidity...the purpose of the detector-vials that I left open for 96 hours in my basement was to collect a representative sample of radon, whose radioactivity then has to be measured by a lab. Problem is the radon within the capped detector-vials doesn’t stay “radon.” It decays into polonium, lead, bismuth, etc., each of which has its own characteristic half-life, so when the lab measures radioactivity a few days after the vials are capped and mailed, it actually measures the radioactivity of the mixture of elements created by radon’s decay, each of whose concentration is constantly changing. Obviously there’s a time relationship between radioactivity and the original radon concentration, but I suspect the longer you wait, the more sources of error creep into the reading. As it costs $30 to read my radon test, I will opt to repeat it rather than risk a bad reading because I delayed shipping the test vials to the lab.
Sunday, May 2, 2010
Radon 101
With this post I start to explore the subject of radon. The focus of my line of inquiry is to improve understanding of the nature and hazard presented by radon gas in residential properties.
For anyone who sells real estate in central Pennsylvania radon is one of several common inspection issues. To a great extent the testing and subsequent remediation of radon in homes has become routine.
When I started selling real estate in 1995 the EPA had not yet published an “actionable level” for radon. Today the actionable level is 4 pCi/L (picocuries per liter), meaning the EPA recommends that you install a radon mitigation system for home radon levels at or above 4 pCi/L.
In 1995 we relied on a chart in the EPA radon pamphlet that estimated the increased risk of lung cancer based on the radon reading in the home and length of exposure, i.e., risk vs dosage. Buyers and sellers would negotiate over the actionable level. It wasn’t unusual to write a sales agreement specifying 10 pCi/L, 12 pCi/L, or even 20 pCi/L as the level above which the seller would install a radon system. In essence the parties were negotiating risk.
This seemed like a grown-up way to deal with this type of environmental hazard. Even at 20 pCi/L the actual risk of lung cancer is still small. For many homebuyers this incremental risk is acceptable in the context of all the other risks that we are exposed to in our daily lives. Unfortunately, as far as I am concerned, the risk vs dosage chart disappeared after the EPA published new guidelines that included its recommendation that 4 pCi/L was the actionable level. This took away a useful tool for evaluating risk. It made radon as a real estate issue cut & dry—above 4 pCi/L the seller installs a system. It almost certainly resulted in more radon systems being installed. And, not inconsequentially, it increased the cost of the typical real estate transaction.
The EPA has made the reduction of indoor radon a matter of public policy and effectively substituted its judgement of acceptable risk for the homeowner's.
Facts & figures…in Cumberland and Dauphin counties, where I live and work, the average radon levels are, respectively, 11.7 pCi/L and 13.9 pCi/L (apparently the geology of southcentral PA makes high radon likely). Over 60% of homes in these counties likely exceed 4 pCi/L radon level in the basement.
Radon testing and a radon system cost about $850 ($100 test + $750 system). In 2009 the median-priced house in my multi-list area was $162,000. Therefore radon remediation adds about ½% to the typical home purchase. This is not insignificant. Certainly it is not unreasonable to ask whether the benefit of reducing the radon concentration below 4 pCi/L is always worth this cost. What if the original reading is 4.5 pCi/L? What if the new owners don’t intend to spend much time in the basement?
There is a lot of documentation about radon available online—both consumer-oriented and academic. The EPA maintains an extensive web site, as does the Pennsylvania Department of Environmental Protection. While 4 pCi/L is the de facto standard for safe indoor air quality—it’s pre-printed on the Pennsylvania Association of Realtors (PAR) sales agreement—the EPA actually recommends homeowners ”consider” installing a radon system when the radon reading is between 2 and 4 pCi/L (what does “consider” mean here? ). By this strict standard 80% of homes in southcentral PA need a radon system. For reference the average outdoor reading is 0.4 pCi/L.
As it happens I don’t know the radon level in my own house. Several years ago I finished the basement. I spend a lot of time down there, so it’s a probably a good idea I find out (I don’t disagree with the EPA’s recommendation to test your house). To this purpose I bought a testing kit for about $7 at Home Depot. The test kit is manufactured by Pro-Lab. While I intend to discuss testing in a separate post, for the record this particular kit is a passive, short-term test using liquid scintillation technology. Tomorrow I will cap the two detectors that I placed in the basement and send them to Pro-Lab for reading.
For anyone who sells real estate in central Pennsylvania radon is one of several common inspection issues. To a great extent the testing and subsequent remediation of radon in homes has become routine.
When I started selling real estate in 1995 the EPA had not yet published an “actionable level” for radon. Today the actionable level is 4 pCi/L (picocuries per liter), meaning the EPA recommends that you install a radon mitigation system for home radon levels at or above 4 pCi/L.
In 1995 we relied on a chart in the EPA radon pamphlet that estimated the increased risk of lung cancer based on the radon reading in the home and length of exposure, i.e., risk vs dosage. Buyers and sellers would negotiate over the actionable level. It wasn’t unusual to write a sales agreement specifying 10 pCi/L, 12 pCi/L, or even 20 pCi/L as the level above which the seller would install a radon system. In essence the parties were negotiating risk.
This seemed like a grown-up way to deal with this type of environmental hazard. Even at 20 pCi/L the actual risk of lung cancer is still small. For many homebuyers this incremental risk is acceptable in the context of all the other risks that we are exposed to in our daily lives. Unfortunately, as far as I am concerned, the risk vs dosage chart disappeared after the EPA published new guidelines that included its recommendation that 4 pCi/L was the actionable level. This took away a useful tool for evaluating risk. It made radon as a real estate issue cut & dry—above 4 pCi/L the seller installs a system. It almost certainly resulted in more radon systems being installed. And, not inconsequentially, it increased the cost of the typical real estate transaction.
The EPA has made the reduction of indoor radon a matter of public policy and effectively substituted its judgement of acceptable risk for the homeowner's.
Facts & figures…in Cumberland and Dauphin counties, where I live and work, the average radon levels are, respectively, 11.7 pCi/L and 13.9 pCi/L (apparently the geology of southcentral PA makes high radon likely). Over 60% of homes in these counties likely exceed 4 pCi/L radon level in the basement.
Radon testing and a radon system cost about $850 ($100 test + $750 system). In 2009 the median-priced house in my multi-list area was $162,000. Therefore radon remediation adds about ½% to the typical home purchase. This is not insignificant. Certainly it is not unreasonable to ask whether the benefit of reducing the radon concentration below 4 pCi/L is always worth this cost. What if the original reading is 4.5 pCi/L? What if the new owners don’t intend to spend much time in the basement?
There is a lot of documentation about radon available online—both consumer-oriented and academic. The EPA maintains an extensive web site, as does the Pennsylvania Department of Environmental Protection. While 4 pCi/L is the de facto standard for safe indoor air quality—it’s pre-printed on the Pennsylvania Association of Realtors (PAR) sales agreement—the EPA actually recommends homeowners ”consider” installing a radon system when the radon reading is between 2 and 4 pCi/L (what does “consider” mean here? ). By this strict standard 80% of homes in southcentral PA need a radon system. For reference the average outdoor reading is 0.4 pCi/L.
As it happens I don’t know the radon level in my own house. Several years ago I finished the basement. I spend a lot of time down there, so it’s a probably a good idea I find out (I don’t disagree with the EPA’s recommendation to test your house). To this purpose I bought a testing kit for about $7 at Home Depot. The test kit is manufactured by Pro-Lab. While I intend to discuss testing in a separate post, for the record this particular kit is a passive, short-term test using liquid scintillation technology. Tomorrow I will cap the two detectors that I placed in the basement and send them to Pro-Lab for reading.
Thursday, April 15, 2010
Metro Harrisburg Housing Price Trends
OK fellow real estate wonks…let’s finish the topic of trending house prices.
As noted in an earlier post Harrisburg is not one of the twenty metro areas in the S&P/Case-Shiller Index. Presumably its small size would make it difficult to collect a sufficient number of repeat sales to have a statistically significant sample size without either extending the collection period and/or expanding the metro area, both of which would make the resulting index less useful to someone selling homes in Harrisburg.
Therefore, in small metro areas, such as Harrisburg, PA, the multi-list is typically the best (or only) source of housing market statistics. My local multi-list, the Central PA Multi-List, publishes mean (average) and median house prices quarterly.
The historical residential sales figures I have collected date back to 1991. The statistics reported in 1991 were rudimentary—units sold, sales volume, and average price. Gradually the Central PA Multi-List added more statistics—average days on market, number of active listings, median sale price, and breakdowns by county and price range. Today a motivated real estate wonk can download the entire multi-list database to Excel and analyze to his/her heart’s content.
For reasons never made clear (to me anyways) the Central PA Multi-List based all its sales statistics through 2006 on settled and pending (under contract) properties in any quarter or year, presumably using the list price of pending properties. Inclusion of pending properties doesn’t make sense as a) actual sale price is historically 97% of the list price at the time a property goes under contract, and b) some deals fall through. All of which suggests that pending properties would tend to artificially inflate the average and median house price figures. Curiously, when the Central PA Multi-List recomputed sales statistics for the years 2002 through 2006 without pending properties, the average and median increased--go figure!
The chart above shows trendlines for Harrisburg housing sales from 1991 to present. The old-style average sale price (including pending sales) is the blue line from 1991 to 2006. The new-style average sale price (excluding pending sales) is the red line from 2002 to 2009. Note slight discrepancy between the two sets of average sale prices in the overlap years 2002 to 2006.
The Central PA Multi-List has only published the median sale price from 2002 to the present. I have previously argued the median is more useful than the average as a measure of "typicalness" for housing. Here it is displayed as the green line from 2002 to present. All median house prices exclude pending sales (thankfully). The new-style average and new-style median trendlines closely follow each other separated by about $25,000.
As noted in an earlier post Harrisburg is not one of the twenty metro areas in the S&P/Case-Shiller Index. Presumably its small size would make it difficult to collect a sufficient number of repeat sales to have a statistically significant sample size without either extending the collection period and/or expanding the metro area, both of which would make the resulting index less useful to someone selling homes in Harrisburg.
Therefore, in small metro areas, such as Harrisburg, PA, the multi-list is typically the best (or only) source of housing market statistics. My local multi-list, the Central PA Multi-List, publishes mean (average) and median house prices quarterly.
The historical residential sales figures I have collected date back to 1991. The statistics reported in 1991 were rudimentary—units sold, sales volume, and average price. Gradually the Central PA Multi-List added more statistics—average days on market, number of active listings, median sale price, and breakdowns by county and price range. Today a motivated real estate wonk can download the entire multi-list database to Excel and analyze to his/her heart’s content.
For reasons never made clear (to me anyways) the Central PA Multi-List based all its sales statistics through 2006 on settled and pending (under contract) properties in any quarter or year, presumably using the list price of pending properties. Inclusion of pending properties doesn’t make sense as a) actual sale price is historically 97% of the list price at the time a property goes under contract, and b) some deals fall through. All of which suggests that pending properties would tend to artificially inflate the average and median house price figures. Curiously, when the Central PA Multi-List recomputed sales statistics for the years 2002 through 2006 without pending properties, the average and median increased--go figure!
The chart above shows trendlines for Harrisburg housing sales from 1991 to present. The old-style average sale price (including pending sales) is the blue line from 1991 to 2006. The new-style average sale price (excluding pending sales) is the red line from 2002 to 2009. Note slight discrepancy between the two sets of average sale prices in the overlap years 2002 to 2006.
The Central PA Multi-List has only published the median sale price from 2002 to the present. I have previously argued the median is more useful than the average as a measure of "typicalness" for housing. Here it is displayed as the green line from 2002 to present. All median house prices exclude pending sales (thankfully). The new-style average and new-style median trendlines closely follow each other separated by about $25,000.
Wednesday, March 31, 2010
What Is the "Best" Statistical Measure of Home Prices?
In my last post I discuss various statistical methods used to track housing prices. I suggest that the Case-Shiller Index, which uses the repeat-sales method, is the current gold standard.
Case-Shiller's utility is limited by the relatively few metro areas it covers--twenty to be precise. I happen to live and work in the Harrisburg, PA metro area. The nearest city included in the Case-Shiller Index is Washington, DC, one hundred miles south and a far different housing market than Harrisburg (trust me).
So...if you live in a smaller metro area you probably depend on your local multi-list service to periodically report sales statistics, usually the mean (average) and median home price. Personally I like to present this data to home sellers when I talk about the market they are selling into. As my local multi-list reports both the mean and median, I wondered which stat better represents central tendency for my marketplace.
To this end I collected a year's worth of home sales data for the West Shore of the Harrisburg metro area (the collection of munipalities west of the Susquehanna River). For 2009 there were 1,962 residential units sold. The histogram below shows the distibution of home sales. It has a Bell Curvish shape skewed to the high end. Thirteen sales over $700,000 largely account for the long "tail" on the distribution. I suspect this is a characteristic of many real estate markets that include very high-end communities.
Superimpose the mean and median on this distribution (see below) and you "see" a $20,000 gap between the two measures of central tendency. Visually the median appears closer than the mean to what most people would consider the typical house price. Also, in this case, the median corresponds with the mode, which is the most frequent value in a distribution.
The conclusion of my simple test is that the median seems the more appropriate measure of central tendency or typical-ness in the housing market. As it is less sensitive than the mean to outlying values, i.e., the relatively few high-priced home sales, it should also be less volatile quarter-to-quarter or year-to-year, and therefore a better statistic with which to trend housing prices.
Sunday, March 28, 2010
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.
• 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.
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