Maybe the exuberence wasn’t quite so irrational.

Quick!  Name one economist!

“Uh, Robert Shiller.  I liked Irrational Exuberance.  Well, I didn’t read it, but I heard about it.  It’s great!  He’s a genius!  Everybody says so!”

Roller Coaster Track

I don’t suppose it hurts Shiller’s credibility that 1) the news media has changed his full name to Nobel-Prize Winning Economist Robert Shiller, and that 2) the home price indices he helped develop are quoted so frequently, and with such reverence that you might think they’re handed down from Mount Sinai monthly or quarterly depending on the index.  “The S&P/Case-Shiller Home Price Indices are the leading measures of U.S. residential real estate prices,” says their publisher, S&P Dow Jones, “tracking changes in the value of residential real estate both nationally as well as in 20 metropolitan regions” .  The Wall Street Journal calls them “perhaps the most cited” of all home price indices.  Google “Case-Shiller Home Price Index” and you’ll get about 459,000 results in .30 seconds.

But for years there have been accusations that the Case-Shiller Index is flawed, perhaps seriously.  Housing economist Tom Lawler took aim as early as 2009, calling Shiller’s data “bogus” and claiming that Shiller “cobbled together data that are inconsistent and sometimes unreliable”, according to the April 24, 2009 Wall Street Journal.  Shiller responded that Lawler’s claims were “wildly exaggerated”.  However, the Journal cautioned that “no one has found a precise way to measure changes in house prices”.

Let me repeat that:  No one has found a precise way to measure changes in house prices.  Not even a Nobel-prize winning, best-selling trusted brand name in economics who tells lots of people exactly what they want to hear and gets plenty of opportunities to do so.  A trusted brand name that seems to offer certainty where no certainty can exist.

Yet many journalists, news consumers and financial analysts have accepted Shiller’s indices as gospel truth.  Although how anyone aside from a handful of economists would know how accurate Shiller’s indices are is beyond me but, apparently, not beyond the average fanboy of home price indices and scary real estate headlines.  The Journal quotes a website developer whose assessment of Shiller–“he’s a pretty accurate guy.”–seems to represent the common opinion.  And that’s mild praise compared to the adulation routinely heaped on Shiller by the journalists who interview him.  But I have to ask:  do journalists and website developers have training in real estate economics and statistical analysis?  No, but website developers are entitled to their own opinion, and everyone’s got an opinion on the housing market.  And journalists are entitled (I guess) to hype the product, and Robert Shiller has transcended mere economist to become highly saleable product.

Perhaps the biggest criticism of the Case-Shiller Indices has been that they exaggerate ups and downs in the market, since they measure data that comes mostly from the more volatile urban markets and exclude states that are mostly rural.  And now, Tom Lawler’s noticed something that seems to confirm this:  the latest Case-Shiller National HPI has a significant and unannounced revision in historical home price growth rates, showing slower growth during the 2000-2006 boom, a smaller decline during the bust and market bottom from mid-2006 to late 2011/early 2012 , and a slower growth rate during the recovery.  In other words, Case-Shiller seems to be taking some of the irrational exuberance out of the real estate market.  And it was the lurid ups and downs of that market, as brought to you by Case-Shiller every month or quarter and breathlessly reported by the media, that helped build the Indices’ brand during the crash.

Apparently Bloomberg was the first news outlet to pick up on these revisions, and I owe them a subscription, because I wonder how many other journalists/Robert Shiller Fan Club members would have noticed.  Case-Shiller’s principal economist (who isn’t either Case or Shiller, by the way) has responded that “the index only looks different because it’s been rebuilt with new, higher quality data” that comes from CoreLogic’s recent purchase of the indices.  Which sounds to me like an admission that the old data had drawbacks.  Which is what some of us were saying years ago.

But don’t read too much into those revisions, says Case-Shiller.  But go ahead, says Bank of America economist Michelle Meyer.  “They can say don’t read too much into it, but it is a different picture,” she said . “We don’t have as big of a hole to climb out of and the gains we’ve seen so far are that much more impressive.”

They say history is always written by the winners.  The history of real estate’s boom, bust and recovery is apparently being rewritten by one of the few winners of that era, Case-Shiller.

copyright © John Fyten  2014

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