The Case-Shiller Index Deciphered

The S&P Case-Shiller Index report for April 2011 (released 6/28/11) indicated the first increase in home prices for the San Francisco Metropolitan Statistical Area (MSA) in 8 months. This is based upon the Case-Shiller analysis of home sales data for the 5 counties of San Francisco, Marin, Contra Costa, Alameda and San Mateo. The statistics quoted by the media are almost always for the overall aggregate San Francisco MSA Index. And, excepting the mildly positive April report, the news has mostly been of continuing declines.

Unfortunately, the Case-Shiller overall aggregate Index is the wrong Case-Shiller Index to use when assessing market trends in the city and county of San Francisco itself (as opposed to the 5-county San Francisco MSA):

  • First of all, it should be noted that the C-S Home Price Index tracks price trends for houses only (single family dwellings or SFDs) — not condos, co-ops, TICs or multi-unit buildings. And, as with all general statistics, what’s important are not the monthly fluctuations up and down, but consistent longer term trends: home values don’t actually fluctuate like stock prices. It should also be noted that there is typically a 4-8 week time lag between offer-acceptance and closed sales: thus April’s Index mostly reflects market activity in February and March.
  • Furthermore, Case-Shiller tracks not only overall aggregate house prices, but house price trends broken into 3 price tiers: low, middle and high — dividing the total number of sales into thirds.
  • The “High Tier” price range was defined by C-S in April 2011 as those homes selling for over $580,000 (the exact number changes monthly). In the city of San Francisco, over the past 17 months, roughly 70% of all our house (SFD) sales were over $580,000. If we exclude the two least affluent, southern Realtor districts running from Bayview to Oceanview (hit hardest by foreclosures and distress sales), and look only at the 8 central and northern Realtor districts, then over 90% of our house sales were in the “High Tier.” (Just for the record, the majority of our condo sales is also above $580,000.)
  • Nationally, as well as in the state, Bay Area and the city of San Francisco itself, the lower the price segment, the harder hit it has been by distress sales (bank-owned property and short sales). The greater the percentage of distress sales in a price segment and its associated neighborhoods, the larger the decline in value over the past 3 to 5 years.
  • The 5-county, SF Metro Area SFD housing stock — in all price tiers — in year 2000 was approximately 948,000 SFD units. The city of San Francisco contains about 114,000 SFD units — or only 12% of the metro area total. Thus the overall Index is heavily skewed toward the markets of the other 4 counties. However, the city’s percentage of SFD units in the higher price ranges would be significantly greater, though still a minority of total sales.

It’s obvious that the Case-Shiller High-Tier Price Index for the San Francisco MSA is the one most applicable to the real estate market of the city and county of San Francisco.

For the record, the SF MSA High Tier Index increased in both March and April 2011, but, as mentioned, monthly changes are only meaningful if consistent over the longer term.

Which brings us to the charts below:


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Looking at the top chart of C-S Index “High Tier” price points in January of each year since the year 2000, we see the massive appreciation from year 2000 to peak values in 2006 – 2008 (different neighborhoods of the Bay Area and the city peaked at different times within that time period); then, after the September 2008 financial markets crash, an 18% – 22% decline to January 2009. That seems correct as an overall average for the price adjustment that generally occurred in San Francisco’s 8 central and northern districts.

The scale of the differences in impact on the respective price segments and on their associated areas of the Bay Area is enormous. Price declines from January 2006 to January 2009 for the “Low Tier” price segment (under $325k) was a staggering 57%; for the “Middle Tier” ($325k to $580k), it was a still huge 37%. The overall aggregate decline was 42%. Compare that to the “High Tier” decline of a very significant, but much lesser 22%, most applicable to SF’s 8 more affluent districts. (The 2 southern SF districts, dominated by sales in the upper-low and mid price tiers and hard hit by distress sales, saw declines typically running from 30% to 45%.)

(The second chart indicates the TOTAL declines in house prices from January 2006 to April 2011 for the 3 price-tier indexes and the aggregate Index.)

Post market meltdown, January 2009 to April 2011, over a period of 27 months, the C-S Index for “High Tier” priced homes shows a further 1.3% decline. Even if one refuses to consider a reasonable margin of error in the calculation (or that most of San Francisco houses should actually be in an “Upper High Tier” category), a price adjustment of 1.3% comes very close to what we’ve concluded for quite some time: generally speaking, San Francisco has experienced a basically stable home price market over the past 2 years, especially in the 80% of our Realtor districts where the median house sales price is typically above $850,000.

As noted above, though not shown on the charts, the Case-Shiller Index recorded small upticks in High Tier home values in both March and April 2011 for the SF MSA. (The Overall Aggregate Index for the SF MSA also ticked up in April for the first time in 8 months.) Based upon what we’re seeing in the city market, both statistically and in the hurly burly of deal-making — i.e. a significant tightening in the supply and demand dynamic within SF — we believe there is a good chance the Index will indicate further upticks in High Tier home prices in coming months as well.

If that occurs in a sustained manner, it might be yet another indication that San Francisco home prices did indeed hit bottom in 2009-2010 and are now starting to recover. Time will tell.

Further information on the data points and methodology of the S&P Case-Shiller Home Price Index is publicly available on their website.

Statistics are generalities, subject to fluctuation due to a variety of reasons. 
All information herein is derived from sources deemed reliable, but may contain errors and omissions, and is not warranted.

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