Case-Shiller for Las Vegas...Up.
Posted: January 26, 2010 by John McClelland
Today the Standard & Poors Case-Shiller home price indices were released. There are always a lot of articles that come out after this release. Many are focused on year-over-year changes and few consult the seasonally adjusted figures. Further, many people don't know that Standand & Poors also calculates tiered price indices. These are homes grouped by price tiers, that way we can make even better comparisons. Like granny smith apples to granny smith apples versus comparing granny smith to Blenheim (yeah I had to look that one up). While they are all apples, each variety of apples tastes different. That's one reason I like repeat sale indices over median indices, which are less robust given the different mix of homes in each sample, often like calculating a median of apples and oranges.
I find that residential real estate prices do exhibit seasonality; therefore I think it’s appropriate to use seasonally adjusted indices. The interesting thing about the seasonally adjusted Case-Shiller indices for Las Vegas is…it confirms flattening in each price tier. In fact the October to November observations showed an increase in the low and middle tiers. After months of month-to-month declines (since 2006 and 2007 actually) you would think this would somewhat newsworthy. Further, as you can see from the trend I’ve drawn for the low-tier index, prices are deeply below trend. The trend I drew does not incorporate appreciation from the 2000’s either, even though the early 2000’s did have some organic price increases due to heavy inbound migration and a booming job market. Further, we ignore the whole bubble period; therefore my trend line is really not that generous for long-term appreciation. Nevertheless, the low-tier index appears to be 28% bow trend.
Overshooting on the downside from a bubble is not a surprise since a lot of assets have exhibited this in the past. You can see the arcing in each series for the recent few months observations and that is the flatting I mentioned. Hopefully this is an inflection point and that prices will at the least remain stable (although I am curious about how the finality of the tax credit will impact prices, I’m still comfortable around the prices we’ve been seeing). Below trend can be good for several reasons. Take the reverse scenario of buying above trend. Often prices return to long run trends, implying a bad decision in purchasing above trend. Buying below trend is a lot easier case to make if you’re not emotional. Additionally, these below trend prices often result in a lower mortgage payment than rent (can be thought of like a low P/E ratio in equities). I also find it curious that folks who bought way above trend during the bubble don’t think it’s a good idea to buy now even though we are way below trend. One last note, low interest rates should not last indefinitely and this should be a factor for many potential buyers.
Source: Standard & Poors.
This is the seasonally adjusted set of indices for Las Vegas.