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.

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.

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.