Shiller Hosuing Index Picking Up More Doubters
- Posted by ToddSullivan
- on April 24th, 2009
From the WSJ:
Now another economist, Thomas Lawler, says Prof. Shiller’s chart is “bogus.” Mr. Lawler says Mr. Shiller cobbled together data that are inconsistent and sometimes unreliable. Mr. Shiller defends his work and accuses Mr. Lawler of making “wild allegations.”
The clash is more than just a spat between two of America’s most prominent housing mavens. It could affect the debate about exactly where the U.S. is in its housing cycle. The squabble also illustrates the paucity of reliable information on house prices.
If they rely too heavily on house-price gauges, politicians may get a distorted view of the severity of the slump and support overly drastic measures, says Kenneth Rosen, a housing economist at the University of California, Berkeley. Mr. Lawler says the Shiller chart also appears to understate the long-run rate of increase in home prices.
No one has found a precise way to measure changes in house prices. Because no two homes are exactly alike, changes in the price of one won’t necessarily be matched even by apparently similar homes nearby, much less those hundreds of miles away. Though some indexes track price changes in the same set of houses over time, those can be distorted by major improvements in some of the houses and deterioration in others. The publicly recorded transaction prices, used to create indexes, often are distorted by incentives given to buyers that aren’t tallied in the price.
For 1890 to 1934, Mr. Shiller used data from a trio of economists led by Leo Grebler. Because he found no index for 1934 through 1953, Mr. Shiller wrote, “I had my research assistants fill that gap by tabulating prices in for-sale-by-owner ads in old newspapers,” covering just five cities. For 1953 through 1975, Mr. Shiller used an index compiled by the U.S. Bureau of Labor Statistics, or BLS. An index from the regulator of Fannie Mae and Freddie Mac covers the period through 1986, after which Mr. Shiller uses the S&P/Case-Shiller index he created with another economist, Karl Case.
“In other words,” Mr. Lawler wrote in a recent edition of his daily housing-market newsletter, “the long-term chart is based on a concatenation of different time series of home prices which use different methodologies, have different samples, measure different things, and all in all are, well, different.”
Mr. Lawler, a former Fannie Mae economist who now is an independent consultant in Leesburg, Va., says the BLS data used by Mr. Shiller was based on a “very small sample” and so isn’t reliable. Mr. Shiller’s chart shows that home prices from 1940 through 2000 rose at an annual real, or inflation-adjusted, rate of 0.7%. Data from the Census Bureau, however, puts the real rate at 2.3% for that period. Part of the difference may be due to improvements in the quality of homes, Mr. Lawler says, but he doubts that accounts for the whole gap.
Youtube plotting of housing prices on a roller coaster:
What to think?
I’m not sure how much confidence we can have in the Shiller data since the inputs it uses are not from the same series. It is sort of like trying to draw historical conclusions on stock prices by using different indexes for different periods. It doesn’t work.
Because of that, drawing conclusions on Shiller because of events that happened in the 1940’s based in his data I think is flawed and prone to massive error. Now it may also be part truth that Case-Shiller is a self fulfilling prophecy. If the index is treated as gospel, and it says home prices must fall “x”, then they may actually do so as potential buyers sit on the sidelines waiting to catch the low. The death of buyers then causes sellers to lower prices to move inventory.
If that is true then the problem is two fold. Incomplete data being used to make predictions and a publics blind acceptance of those outcome sin part causing them.
I think a healthy debate on the accuracy of the historical price points used in necessary.
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