The buzz around homebuying in Southern California this summer has centered on intense bidding wars. But oddly enough, real estate valuation metrics don’t seem to reflect such a frenzied market.
How could that be? Maybe these anecdotes are just outliers. Or perhaps the aggressive pricing we’ve seen this summer will start showing up in housing indexes this fall when pending sales are finalized.
To understand this discrepancy, let’s first explore the two main yardsticks used to analyze the overall price direction of the housing market. Both of these yardsticks track data from closed transactions and estimate whether a region’s prices are increasing, decreasing, or remaining flat.
We’ll start with the median selling price, a benchmark that often receives criticism in the real estate world. It’s a relatively straightforward calculation that reflects the middle point of prices paid by all homebuyers during a specific period. Half of the prices are higher, and half are lower. Critics argue that medians can be influenced by the mix of homes sold and may not accurately reflect actual pricing trends.
Most of the homebuying trends reported by the Southern California News Group are based on a 35-year history of median prices for all types of residences in six local counties. This data is provided by CoreLogic, an Irvine-based company formerly known as DQNews and DataQuick.
The main alternative is the so-called “paired sales” indexes. These calculations measure price performance by examining the gains or losses for the owners of each existing single-family home sold in a given month. The Case-Shiller version of this index is the most well-known, named after the pioneering work of two professors from New England.
Is the math better?
To answer that question, I analyzed 35 years of price fluctuations in the Los Angeles-Orange County region and San Diego County using both the Case-Shiller indexes and the median prices. I compared 414 months of 12-month movements.
Surprisingly, my analysis found that despite the mathematical complexity of the Case-Shiller indexes, there isn’t much difference in the long-term results compared to the median price gauge.
Let’s consider the average annual price gains since 1988. In LA-OC, the yearly gains were 5.6% when measured by Case-Shiller and 6% for the median price. In San Diego, the gains were 6.1% a year by Case-Shiller math and 5.7% for the median price.
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Let’s also look at the extremes of the past 35 years. The biggest 12-month gain in LA-OC was 33% for both Case-Shiller (in July 2004) and the median price (in April 2004). In San Diego, the top gain was 33% for Case-Shiller (in July 2004) and 28% for the median price (in November 2002).
And what about the biggest loss? In LA-OC, Case-Shiller recorded a drop of 28% (in October 2008), while the median price dropped 36% (in January 2009). In San Diego, Case-Shiller’s worst decline was 27% (in October 2008) compared to a 35% drop for the median price (in January 2009).
Effects of the coronavirus
One interesting example of short-term differences is the impact of the pandemic on home prices.
Initially, the market experienced a sharp increase in home values driven by a desire for larger living spaces and record-low mortgage rates. Let’s examine the period from February 2020, just before the coronavirus pandemic hit the economy, to the early 2022 price peaks in the housing market.
In LA-OC, Case-Shiller recorded a 46% gain compared to a 35% gain for the median price. In San Diego, Case-Shiller showed a 61% jump versus a 42% increase for the median price.
Then, in 2022, as the Federal Reserve attempted to cool down an overheated economy, interest rates rose rapidly. The housing market experienced a quick correction, with LA-OC prices dropping 8% according to Case-Shiller, compared to an 11% drop in the median price. In San Diego, prices fell 11% according to both measurements.
This year, the housing market rebounded. LA-OC prices increased 6% from the cyclical low through June according to Case-Shiller, compared to a 10% increase in the median price. In San Diego, prices rose 9% from the lows according to Case-Shiller, compared to a 12% increase in the median price.
So what’s the conclusion?
Are there differences? Yes! Are they significant? Not really, in my opinion.
I will also point out that two statistical measurements – standard deviation and correlation – suggest very minimal differences between Case-Shiller and the median price.
You could argue that Case-Shiller was more favorable to home prices during the pandemic. From February 2020 to June 2023, Case-Shiller’s indexes show a 42% gain 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.
However, Southern California housing experts should note that Case-Shiller also indicates more downward periods for local housing.
Looking at all 12-month periods since 1988, Case-Shiller showed year-over-year losses in 31% of those timeframes in LA-OC, compared to 27% according to the median. In San Diego, it was 31% losses for Case-Shiller versus 25% for the median.
Instead of getting frustrated with statistical disparities, I suggest embracing the gaps.
Reports on median prices, like the ones used by this news organization, are typically released just a few weeks after the end of the month. These stats provide a quick snapshot of market conditions. Realtors’ associations also analyze sales of existing single-family homes based on median prices.
In contrast, paired-sales indexes tend to take longer to produce. For example, when Case-Shiller indexes are released on the last Tuesday of every month, they represent data from two months earlier. Other paired-sales indexes are produced by the Federal Home Finance Agency and CoreLogic, among others.
However, late-arriving paired-sales numbers can still provide confirmation of trends or raise questions about the movements in the housing market.
Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at [email protected]Follow Google News
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