When Home Values Don’t Mesh Up

This is a fascinating article and very important to read and understand. You have basically two approaches to changing home values:

The Realtor Approach which just gives raw actual sales and compares them to prior period (prior year) sales. This is crude, but simple. but can be skewed if higher priced homes are selling at a faster or slower pace than the rest of the market. For example, in the LA Times yesterday disclosed that median home prices in Southern California for January 2008 were down something like 14% year over year. Importantly, for home lenders, this does not mean that everyone’s home is now worth 14% less than it was a year ago….the Realtor association said that the main reason for this decline (and I agree) is that larger homes are not selling partly because of the problems jumbo borrowers are having in obtaining financing.

OFHEO and Case/Shiller’s home price indices, which are discussed extensively in the attached WSJ article, are meant to strain out this issue and they compare the exact same home sale price change from the last time it sold (let’s say it just sold in January 2008 and it last sold in October 1999) which gives you the precise (except for remodels/major home improvements) cumulative and annualized rate of home price appreciation/depreciation. What I have been struggling to understand and no one has been able to explain to me is how they take that data and turn it into the rate of home price change in say the last year (from January 2007 to January 2008). this is not very transparent and I assume filled with significant assumptions (probably some very complicated regression-type analysis). How do they know how much of the cumulative appreciation/deprecation of that nearly 10 year period occurred in the last year.

For my money, I would rather see the Realtor actual sales data used and sorted by zip code by square footage added to lot size and only those with a large enough statistical population used. This would be much more transparent and easy to understand which is important for consumers, lenders, and others in times like these.

Read This Article…its a good one!

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