Academic journal article Cityscape

Trend-Spotting in the Housing Market

Academic journal article Cityscape

Trend-Spotting in the Housing Market

Article excerpt

(ProQuest: ... denotes formulae omitted.)

Data Shop

Data Shop, a department of Cityscape, presents short articles or notes on the uses of data in housing and urban research. Through this department, the Office of Policy Development and Research introduces readers to new and overlooked data sources and to improved techniques in using well-known data. The emphasis is on sources and methods that analysts can use in their own work. Researchers often run into knotty data problems involving data interpretation or manipulation that must be solved before a project can proceed, but they seldom get to focus in detail on the solutions to such problems. If you have an idea for an applied, data-centric note of no more than 3,000 words, please send a one-paragraph abstract to david.a.vandenbroucke@hud.gov for consideration.

Introduction

The U.S. housing market is the subject of much research for many good reasons. A house is simultaneously an asset and a home. As an asset, it is related to a homeowner's long-term expectations and, as a home, it defines a homeowner's lifestyle and forms his or her life attitudes. As a commodity, a home is related to a large supply chain of construction materials and home equipment, and it generates a significant number of jobs in construction, maintenance, and sales, to name a few. For these reasons, a home is also often an instrument of government intervention to the economy as a whole, a fact that contributes to the inherent endogeneity in the formation of home prices. For these reasons, conventional economic wisdom is not entirely unfounded in maintaining that as the housing market goes, so goes the rest of the economy.

The U.S. housing market certainly has no shortage of house price indices, an additional fact that underlines the importance of this market-which then begs the question, "Why would we need another one?" To answer this question and to explain my choices in this article, I first briefly discuss the available indices.2 This housing market has five main housing price indices, two of which are so-called median house price indices, with the other three being repeat sales indices. The former type comprises the indices of the National Association of Realtors® and the U.S. Census Bureau, and the latter type comprises an index by the Federal Housing Finance Agency (FHFA) and two proprietary indices-one is from CoreLogic, Inc. (CoreLogic), and the other is the well-known Standard & Poor's (S&rP)/Case-Shiller® U.S. National Home Price Index (Case-Shiller index). These indices have various pros and cons and exhibit differences, which may be explained by their methodologies. In short, median house price indices are blind to intrinsic, hedonic value, but the repeat sales indices use a prior sale as a proxy for the hedonic value. The FHFA index is a repeat sales index, albeit based only on sales of houses securitized by Fannie Mae and Freddie Mac, but the Case-Shiller and CoreLogic indices are based on "arm's length transactions," with the CoreLogic index being slightly broader. I chose the Case-Shiller index because the data are readily available on the S&P website.

With all these indices, then, why do we need yet another index? If the buying thoughts of prospective homebuyers or the selling thoughts of prospective homesellers can in some way be captured in real time, we should be able to monitor housing market conditions regardless of the fundamentals that may be driving the housing market. The result would be a behavioral housing market index. A simple ratio of the number of buying thoughts to the number of selling thoughts should indicate something about the formation of upcoming home prices. Underwriting standards, interest rates, mortgage rates, lending trends and practices, the inflow of foreign capital, the prevalence of securitization of mortgages, government programs for affordable housing, tax incentives for homebuyers, labor market conditions: whatever the fundamentals are at each point in time, they should shape and, in fact, be captured by that buy-to-sell ratio. …

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