The problem with Case/Shiller

First, there is no such thing as a national real estate market. A sale in Tucson has no bearing on a sale in Houston or Atlanta or Boston. All real estate is local. No matter what the Case-Shiller Index says, what matters to your local market is what’s happening in your local market. Each neighborhood has its own housing economy, something that cannot be captured by a national report. A sale in Detroit does not affect a sale in Austin or San Antonio. That is why you hire a local realtor, rather than one working out of Detroit.

Second, the only metropolitan area from Texas included in the Case-Schiller Index is the Dallas/Fort-Worth area. The real estate market in DFW has not fully turned around and has not been as robust as other Texas cities, so it is hardly representative of the state as a whole.

case shiller

This graph is a great example of why you can’t apply a national index to your local market. What happens in the twenty index cities has no bearing on what happens here in Austin – even during a phase of speculative frenzy.
The Case-Shiller index has reported home values for nearly thirty years and has become a widely reported and analyzed measurement of the housing market. It is commonly referred to by the media, especially if the index has dropped recently. Few, if any, other statistics are more watched than the Case-Shiller by those in the housing industry.

Despite the popularity of the index it contains some flaws and limitations. Among my concerns are the relatively small sample size and that it only looks at repeat sales of single family homes, taking new homes, condos, and multi-family units out of the mix. Mostly, though, the measurement is limited because what it implies does not exist – there is no such thing as a national real estate market.

I have discussed this before. Here is my opinion of the Case-Shiller index and why I believe it should be given less weight by the media. While I don’t expect my thoughts to bring radical change to the way the housing industry is covered by the press, I do hope that bringing out this information will help realtors, builders, investors, and others to understand what the index means and to whom it is important.

First, as said above, “There is no such thing as a national real estate market.”

As a buyer or observer in today’s market, though, you can’t take the Case-Shiller Index at face value. Its methodology is far too flawed to be the “final word” in home prices.

The first big Case-Shiller Index flaw is its relatively small sample size. S&P positions the Case-Shiller Index as a national index but its data comes from just twenty cities total. And they’re not the twenty most populous cities, either. Notably missing from the Case-Shiller Index list are Houston (#4), Philadelphia (#5), San Antonio (#7), and San Jose (#10). Minneapolis (#48) and Tampa (#55) are included, by contrast.* This means that most U.S. home sales are not included in the Index. Case-Shiller tracks twenty markets that had and have high regulatory parameters, causing values to be artificially high in those areas, causing speculation for a limited number of units.

A second flaw is that Case-Shiller doesn’t measure supply or demand, the true measure of value for any product. Over 50% of the cities are not forecast as growth areas by the Census, essentially homes in the wrong place at the wrong time. Supply and demand imbalances are the ultimate driver behind real estate prices, and local, regional as well as national data shows the balance is improving, with months of resale supply recently declining from twelve to ten months nationally and much less here locally. Normally, those inventories are approximately seven months, and until the overhang of unsold homes is reduced, prices will not recover.

Another Case-Shiller flaw is how it measures a change in home price. Because the index throws out all sales except for “repeat sales” of the same home, the Case-Shiller Index fails to capture the “complete” U.S. market. The Case-Shiller index relies exclusively on transactional data from home sales, a flawed methodology since less than 0.5% of homes are sold each month. That is too small a sample size from which to make broad conclusions about the national housing market

It also specifically excludes condominiums and multi-family homes. In some cities — such as New York, Chicago — homes of these types can represent a large percentage of the market.

Another limitation is that the Case-Shiller Index is on a two month delay. It’s March and we’re only now about to get home data from December. The Case-Shiller Index is far less useful than real-time data of a city or neighborhood.

The biggest problem with Case Shiller is that current market transactions are not representative of overall market trends.

I have a great amount of respect for Dr. Shiller and his predictions. I obviously don’t have an index named after me, so I am not diminishing the work of Dr. Shiller. However there are better indices to follow (Altos Research Mid-Cities composite is a good one, as is the Texas A&M Real Estate Center). However, the best index is a measurement of your individual neighborhoods by your local realtor. By gauging supply and demand, values will be apparent soon enough.

Keep focused on how good our local market is. The media quotes Case-Shiller and other indices without really understanding them – as we have said, national trends are good to watch, but have little bearing on what is happening in local real estate, particularly in Texas, Austin, San Antonio and Houston. Home buyers focus on home prices, not on home sales, as evidenced by the robustness of our local markets over the last 90 days. Most realize that home values and affordability in their local markets are a ‘true value’ today.

* This is the list of the 20 cities tracked in the main Case-Shiller Index, in alphabetical order: Atlanta, Boston, Charlotte, Chicago, Cleveland, Dallas, Denver, Detroit, Las Vegas, Los Angeles, Miami, Minneapolis, New York, Phoenix, Portland, San Diego, San Francisco, Seattle, Tampa, Washington D.C

Coming F1 track challenges Austin hospitality market

Lately, I have had a number of clients and non-clients ask about the hotel and rental prices being quoted by the media for the initial F1 event. Hotels like the Best Western, Motel 6, and Hampton Inn are charging well over $400 per night.

For example, several of my friends from California and Arizona are considering coming to Austin for the Circuit of the Americas race this fall. They’ve been to the Indy 500 several times so they thought they could use that pricing model to work out a potential budget. However, they were not prepared for exorbitant hotel rates. They’re beginning to conclude that the whole trip will be illogically overpriced.

Really, this isn’t a fair comparison. Indianapolis has been hosting major auto events for the last 102 years – Austin is just starting.

What we are seeing is a city that is woefully under-hoteled, underdeveloped, and under built on many levels to host something of this size. This isn’t the fault of the planners or the state, just a reality of the current market.

Austin hotels
Q: How many hotel rooms are in Austin?
A: There are 30,000 hotel rooms in the metro area.
Q: How many hotel rooms are located downtown?
A: There are 6,000+/- downtown hotel rooms currently.
Q:How many hotel rooms in San Antonio?
A: 40,000 in San Antonio, of which nearly 13,000 are located downtown.

In addition to the dearth of hotels, we will not have enough apartments or homes for rent to meet demand for at least the next three years. Austin has less than 7,200 rentals available out of 180,000 total rentals in the five county market. We have 58,000+ people moving here annually. That’s 7,200 rentals for 19,000 families with an average of three people each .So we don’t have enough housing for the people who are moving here permanently.

There are also a number of economic factors that continue to restrain construction, namely a lack of credit and a long entitlement process. Austin will not be able to build enough homes or developed lots to meet the demand either for the next three years.

High rent growth is evidence of this. Rent increase in Austin is projected to be higher than anywhere else in the nation. Austin is among top markets like Menlo Park and Manhattan. For example, we had 98 downtown condos sold in 2011 at an average of $980,000.

limited supply

Unfortunately, that causes hotel and apartment rates to be higher than normal, and because of Austin’s entitlement process, we won’t see this getting better for the next three to five years.

That, coupled with the population explosion, (1.7 million currently, to double to 3.4 million by 2030) will make it a challenge to find lodging. We unfortunately experience the same thing during SXSW and ACL.

According to the Governor’s Office of Economic Development and Tourism, total 2008 traveler spending in the city of Austin was approximately $3.5 billion which supported about 33,000 permanent jobs and accounted for $77.6 million in annual local tax revenue.

Currently Austin has not attracted the amount of convention business that other similar sized cities do, according to a study commissioned by the City of Austin in 2010. With the continued exposure of Austin on a global scale, it is important to realize that the two 1000+ room hotels planned, The Manchester and the Marriott Marquis will bring in another 1000+ permanent jobs, an annual additional $13 Million to $46 million in spending revenues as well as an additional $1.2 million to $2.9 million in additional tax revenues. Austin is currently losing convention business because of the lack of space. Dell no longer is able to host their divisions to anything here, because of the lack of 1000+ room hotels.

The current shortage is great for our business, but is a challenge for those who want to vacation here. There isn’t some conspiracy to limit supply- we have never hosted 2.3 Super Bowls at one time, and few if any are truly prepared for it.