Posted by: Donald Diltz | April 2, 2011

The Case Against Case-Shiller (and other lagging housing market indicators)

President Rick Turley’s SF Bay Area Market Watch

As I opened the morning paper the other day, I saw a story splashed across the business section suggesting that we might be heading into a “double-dip” housing recession based on the latest S&P Case-Shiller index report. What was ironic was that over the past week, I had just finished meeting with my office managers throughout Northern California ­– most of whom were reporting that their local markets were revving up with great activity, and some markets with a real sense of urgency. What gives?

The paradox made me think that a lot of people – consumers and real estate reporters alike – may not realize that such monthly reports as the Case-Shiller index and even the very popular DataQuick Bay Area market report are really lagging indicators of the housing market. They are in effect old news by the time they are released. These reports are based on closed sales the previous month that actually began two or three months before in many cases.

Take the most recent Case-Shiller report: This study came from closed home sales – not in March or even February – but January. Those same transactions began when consumers agreed to buy the home perhaps as early as the fall. These kinds of reports are a very old “snapshot” of the housing market by the time they get to the news media. This would be like someone opening up their sports section last October and instead of seeing the Giants in the World Series, found our local heroes 10 games out of first because the papers was still reporting the July standings.

So what’s a better way to take the current temperature of the market? New sales or pending sales are a much more accurate assessment of what’s happening now because they are a forward-looking indicator. These are sales that have just occurred, but haven’t gone through the 30 days or 60 days necessary to complete escrow. New pending sales offer the best barometer of what’s happening at the moment regarding buyer confidence in the housing market; the transactions that will be reported by Case-Shiller and DataQuick a month or two from now.

And what’s encouraging to me is that all across the Bay Area, pending sales in March are outpacing the same total last year – in some cases by as much as 200% over March 2010. Our Greenbrae office is a good example. The housing market in March was “on fire” in Central Marin, according to our Greenbrae manager. The office was planning for 26 new sales, but exceeded that with close to 60 sales. He said the office has not had a month like this since the boom in ’07 and even then it did not have such a high number of transactions. That story is echoed by many other offices, from Marin down through the Peninsula and across the Bay.

This is not to say that every community and every neighborhood in the Bay Area is seeing a revival in new sales. There are still slow areas that are still challenged, depending on the price point. And even within some cities, certain parts of the market are doing well while others might be soft. And the overall market will continue to be challenged by shadow inventory of distressed properties coming on the market.

But my point is that if you read the lagging indicators like the Case-Shiller report you’d think the market is dropping off the cliff. Far from it. We are definitely seeing a tremendous improvement in many parts of the Bay Area, and we’re not alone.

According to the National Association of Realtors, the pending home sales index for properties nationwide, a forward-looking indicator, rose 2.1 percent to 90.8, based on contracts signed in February, from 88.9 in January. Lawrence Yun, NAR’s chief economist, said, “Pending home sales have trended up very nicely since bottoming out last June, even with periodic monthly declines. Contract activity is now 20 percent above the low point immediately following expiration of the home buyer tax credit.”

The outlook wasn’t even across all regions, however. The PHSI in the Northeast fell 10.9 percent to 65.5 in February. In the Midwest the index rose 4.0 percent in February to 81.1. Pending home sales in the South increased 2.7 percent to an index of 100.3. While in the West the index rose 7.0 percent to 105.6 and is now 0.6 percent higher than February 2010.

“We may not see notable gains in existing-home sales in the near term, but they’re expected to rise 5 to 10 percent this year with the economic recovery, job creation and excellent affordability conditions providing confidence to buyers who’ve been on the sidelines,” Yun said.

One other thought when it comes to housing numbers: It’s important to take the lower median or average sale prices in monthly reports this time of year with a grain of salt.

In many markets throughout Northern California, REOs and short sales can make up as much as 20% to 30% of the entry level sales.  While typical homeowners might take a break from the holidays and list (or re-list) their property in January or February, banks don’t take any breaks in November and December. These listings stay on right through the holidays. So a greater percentage of available listings that sell are “distressed” properties at lower price points, bringing the median and average sales prices down for several months in the New Year.

Below is a market-by-market report from our local offices:

North Bay – Our Greenbrae office, as I mentioned above, had a record month with the local market on fire. Among those transactions are two $2.5 million range properties in Larkspur, a $4 million property in Kentfield and a $5 million property in Ross. The office is buzzing and buyers are out in full force.  Unfortunately, at the same time Marin still suffers from lack of inventory.  Contrasting the high number of opens was a low number of new listings.  We are hopeful that the lack of rain and abundance of sunshine will change some seller attitudes about getting their properties on the market.  In Southern Marin, there is continual activity, and a number of multiple offers on REOs and short sales.  In the upper end of the market, if properties are priced well, they will sell, but they must perceived as a good buy and value, our local manager adds. Meanwhile, our Northern Marin office says inventory is rising, but sales have dipped. In Petaluma, multiple offers in the under $300,000 range continue to dominate the sales activity. Open houses are well attended. And the town of Sonoma is starting to heat up in the million-plus price range. Our Santa Rosa office also reports that sales are on the rise, and the local manager says they expect more new listings for April.  Finally, our Sebastopol manager says that their local market has seemed a bit slow. But there seems to be interest in the upper end, where they sold a $2.5 million home in 15 days and have two more high-end open sales that have come in.

San Francisco – It is beginning to feel like the market has sprung into action, according to our San Francisco Lakeside office manager, who adds that their sales and listings board “is lit up like a Christmas tree.”  Meanwhile, the Lombard office says sales activity and new listings have been steady with about a third of their sales resulting in multiple offers. Our Market Street office reports that the market, especially in the upper end, appears to be gaining steam. There has been a lot of activity at open houses, with as many as 100 people through some listings. A condo in the Mission district was in contract within five days of being on the market.

SF Peninsula — In Burlingame, multiple offers are coming up in every price point as the available inventory is getting smaller. The opens are busy – even condo opens. It feels like all the “fence sitters” who waited out last year have decided to jump into the market. The only trouble is finding a property. Inventory is down in Hillsborough and the other high end markets. Across the hills, it’s still a bit slow on the coast. Our local office says they seem to have extremes – such as all cash for $1+m second homes or buyers wanting the lower end REO’s.  In Menlo Park, our local offices say that sales are on the rise. The market is showing some definite strength in the $2.5 mil plus range, but good inventory is still hard to find. Sales are definitely on the rise in Palo Alto, where inventory isn’t keeping up with buyer interest.  Properties in the $2M range are selling with multiple offers, in excess of 20% over list price. Activity in the $2-5M range is also brisk.  The activity in San Carlos in the last two weeks has been robust.  In the single-family market there were four properties that had multiple offers – including one with 12 offers!  The other nearby areas (Redwood City, Redwood Shores, Belmont) are selling but not quite as quickly and not with multiple offers. In Portola Valley, the market has been steady while in San Mateo, things are showing signs of improvement.  Listing inventory is still lighter than usual, causing more multiple offers. 

East Bay – Our Berkeley office says that suddenly there are lots of deals on the board.  Even properties where a previous deal has fallen through are being quickly resold.  Short sale deals are on the rise. In Danville, the rain last week seems to have had a “dampening” effect although sales activity has picked up strength in the last 2 weeks. The Livermore market has remained steady, with total pending sales in March up about 6%.  At the current sales pace of detached homes in Livermore, we need more quality listings to meet the demand of the buyers, as we have only 2.6 months of inventory of detached homes on the market. The upper end of the market remains strong with four closings of Preview Homes in Livermore during March, which is twice the norm in a month. Things are steady, according to the Oakland-Piedmont office, with the upper end very active. Our Orinda manager says that market is definitely heating up, and buyers are serious and realize it is the time to jump in. Inventory that has been sitting idle is starting to see interest with showings, request for reports, etc. Finally, our Walnut Creek office reports both sales and inventory are climbing again. Previews listing inventory is increasing, too, and what little inventory is coming on, it’s selling.  But some buyers continue to be very selective and wait for the “perfect” home. 


Silicon Valley – Our Los Altos manager reports that the market has been very busy in that city, along with Palo Alto and Mountain View. Buyers are attending open houses in large numbers, and sales above $2 million are picking up. Inventory is starting to increase in Cupertino, with about a quarter of the sales multiple offers.  In San Jose, our Almaden office reports that most areas are selling quickly provided they haven’t raised the list price over the last comp.  Traditional sales (non distressed) are fetching between 5 – 10% above distressed sales. Meanwhile, our Willow Glen manager says sales are picking up and agents are getting more counter offers as well. Open houses are quite busy. In Saratoga, the market has become very active in recent weeks. The only thing holding back more activity is the lack of adequate inventory, the local manager reports. The upper end of the market is particularly strong. The office says three properties over $3 million have sold in the last few weeks.

South County – The past 3 weeks have been very mild in regard to sales and new listings, according to our Gilroy office. Some agents believe the slowdown is due to current world events and things should begin to pick up now that spring and the start of the home buying season is here. Agents in the Morgan Hill office have experienced their own version of “March Madness.”  They have managed to almost fill the sales board with more than 50 sales in one month.   One agent herself has put 9 properties into escrow during March.  In addition, there were 32 closings this month for the Morgan Hill Office.  All of us hope that the momentum continues.

Santa Cruz – Sales activity is definitely picking up, our local manager says.  There are more sales in the over $1 million price point and a lot of cash buyers roaming around. From a year ago sales over $1 million are up 50%. We are watching the law of supply and demand affect this segment of the market, as inventory levels drop, prices edge up, and we are seeing a few more sales.  In the $500K – $1,000,000 range, the inventory is down from a year ago, prices remain about the same, and homes are selling in a relatively short at 92 days on average.  These are all good signs.  If inventory levels remain challenged, we may start to see an increase in prices. Under $500K there is a fairly significant increase in homes under contract from a year ago – about a 48% increase! There is a short supply of inventory, just under 3 months with an average market time of 90 days or less.  Those lower-end properties are getting scooped up by investors and first time buyers.


Monterey Peninsula – There have been more short sale properties come on the market lately, our Monterey area manager reports. Additionally, there have been more REOs in the Seaside area, though not the big influx we’ve been told we’d see by now.  The prices on so many short sale properties are looking to be so low–like such good buys–that there are an increasing number of multiple offer situations.  Working with lenders on short sales continues to be difficult. We just closed escrow on a couple of properties that we’d had offers in on months ago as short sales, but the lenders turned them down, only to have them foreclosed, put back on the market as REOs, and sold to the very same buyers for 15-20% less than offered as short sales!   

One final note on the luxury market – Silicon Valley has been buzzing about the very recent sale of a lavish 25,500-square-foot mansion in Los Altos Hills, reportedly to a Russian billionaire known for his investments in Facebook and Groupon.  The amount paid was anywhere from $75 million to $100 million or more for the property, according to various AP and WSJ news reports. That would make it one of the largest sales in U.S. history along with Donald Trump’s $100 million sale of his Palm Beach mansion in 2008. The buyer in that case was Russian fertilizer billionaire Dmitry Rybolovlev.  And another important fact I’ll share from a Coldwell Banker Previews meeting in Los Angeles this week:  Greater LA had 4 sales over $20M in 2008, and just another 4 over $20M in 2009.  In 2010, they had a 200% increase with 12 estates selling over $20M.  As I’ve said before, the “smart money” calls the bottom of a housing downturn.

That’s it for now. Have a good week!


Rick Turley

President, San Francisco Bay Area

Coldwell Banker Residential Brokerage

tel 415.437.4505


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