Southern California’s homebuying buzz this summer is all about crazy bidding wars, but real estate valuation metrics don’t seem to reflect such a wild market.
How can that be? Maybe the anecdotes are market oddities. Or perhaps the summer’s aggressive pricing will show up in housing indexes this autumn after pending sales are completed.
To understand this disconnect, we must first understand what’s inside the two main yardsticks commonly used to analyze the housing market’s overall price direction. Both track data from closed transactions, estimating whether a region’s prices are up, down or flat.
Start with the median selling price, a benchmark that draws much of real estate’s wrath. It’s rather simple math, reflecting the mid-point of prices paid by all homebuyers in a period. Half are higher, half are lower. The purported knock on medians is that they could be influenced by the mix of what sells vs. actual pricing trends.
Much of the Southern California News Group’s coverage of homebuying trends is based on a 35-year history of median prices for sales of all residence types in six local counties. The data comes from Irvine-based CoreLogic, which previously was DQNews and before that DataQuick.
The top alternatives are the so-called “paired sales” indexes. These geeky calculations measure price performance by looking at the gains or losses for the owner on each existing, single-family home sold in a month. Most folks are familiar with the Case-Shiller version of this index, named for a pair of New England professors who pioneered this math.
Better math?
My trusty spreadsheet reviewed 35 years of price swings for the Los Angeles-Orange County region and San Diego County. It looked at 414 months’ worth of 12-month movements in the Case-Shiller indexes vs. the median. I’ll note that to mirror Case-Shiller’s LA-OC index, the two counties’ median prices were combined into a single sales-weighted average.
What the spreadsheet found might surprise some folks: Despite the mathematic complexity of Case-Shiller, there’s not much difference over the long term from the median price gauge.
Consider the average annual price gains since 1988. In LA-OC, yearly gains ran 5.6% when measured by Case-Shiller vs. 6% for the median price. In San Diego, gains ran 6.1% a year by Case-Shiller math vs. 5.7% for its median.
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Or look at the extremes of the past third of a century. The biggest 12-month gain in LA-OC was 33% for both Case-Shiller (in July 2004) and for the median (in April 2004). In San Diego, the top was 33% for Case-Shiller (in July 2004) and 28% for its median (in November 2002).
And the biggest loss? In LA-OC it was a drop of 28% for Case-Shiller (October 2008) vs. a 36% drop for the median (January 2009). In San Diego, Case-Shiller’s worst was off 27% (October 2008) vs. 35% for its median (January 2009).
Coronavirus curves
One good example of short-run differences is the volatile times of the pandemic era.
Initially, the market saw a sharp rise in home values fueled by a thirst for larger living spaces and plunging mortgage rates. Let’s look at February 2020, just before the coronavirus upended the economy, up to housing’s early 2022 price peaks.
LA-OC saw gains of 46% by Case-Shiller math vs. 35% for the median. In San Diego, it was a 61% jump by Case-Shiller vs. 42% for its median.
Then rates soared in 2022 as the Federal Reserve tried to cool an overheated economy. A swift housing correction saw LA-OC prices drop off the peak by 8%, according to Case-Shiller vs. 11% for the median. In San Diego, prices fell 11% by both measurements.
This year, housing saw a rebound. LA-OC prices gained 6% off the cyclical bottom through June by Case-Shiller vs. 10% for the median. San Diego was up 9% from the lows by Case-Shiller vs. 12% for its median.
Bottom line
Differences? Yes! Major ones? To me, not really.
I’ll also mention that two really nerdy statistical measurements – standard deviation and correlation – suggest very minimal differences between Case-Shiller and the median.
You could say Case-Shiller was more generous to home prices in the pandemic era. From February 2020 through June 2023, its indexes show 42% gains in LA-OC and a 56% increase in San Diego. Median calculations show a 32% jump in LA-OC and a 42% rise in San Diego.
But Southern California housing watchers should note that Case-Shiller also shows more down periods for local housing.
Ponder all 12-month periods since 1988. Case-Shiller showed LA-OC with year-over-year losses in 31% of those timeframes vs. 27% by the median math. In San Diego, it was 31% dips for Case-Shiller vs. 25% for median.
Instead of being flustered about statistical variances, I suggest embracing the gaps.
Reports on median prices, such as those used by this news organization, are typically reported just a few weeks after the month’s end. View those stats as a quick snapshot of market conditions. Realtors’ associations also use median-based analysis of sales of existing single-family homes.
Yet paired-sales indexes tend to take more time to produce. For example, when Case-Shiller indexes are released on the last Tuesday of every month, it’s an analysis from two months earlier. Other paired-sales indexes include work done by the Federal Home Finance Agency and CoreLogic.
Nevertheless, look at these late-arriving paired-sales numbers as confirmation of trends. Or if you see differences, think of the gaps as question marks about the market’s movements – not the validity of the math.
Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at jlansner@scng.com
Source: Orange County Register
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