Did Bay Area Home Prices Actually Go Down in May?

Proving again that different conclusions can be drawn from the same data, Morgan Stanley is contradicting Case-Shiller’s claim that Bay Area home prices rose by 1.7% from April to May. According to Morgan Stanley, San Francisco MSA home prices actually fell by 1.2 percent.

The Case-Shiller claim was suspect to begin with.

Flashback: Are Bay Area Home Prices Really Up 18 Percent?

For more detail, Case-Shiller also breaks down each MSA into price tiers and tracks the performance of the top, bottom, and middle thirds. One would think that these tiers would reflect the 18.3% boost, but, strangely, they don’t.

By my calculations, the lower third has appreciated by 14.9%, the middle third by 12.8% and the top third by just 8.3%.

These numbers certainly seem more believable (at the lower tier anyway).

But, if no segment of homes even appreciated by 15%, how can the index say that the MSA appreciated by 18.3%?

Morgan Stanley broke the data down a different way. They removed all of the short sales and foreclosures and looked only at regular, non-distressed sales.

BusinessWeek reports:

San Francisco prices fell 1.2 percent while New York gained 0.8 percent in May, Morgan Stanley said in a report, which looked at homes that weren’t in foreclosure or involved in a short sale, in which a buyer pays less than the amount owed on the mortgage and the bank agrees to take a loss.

Short sales increased by 30 percent nationwide over the past year, destabilizing the housing-price indexes, said Oliver Chang, a U.S. housing strategist at Morgan Stanley who co-wrote the report. Proceeds from short sales are 15 percent to 40 percent more than foreclosed homes, driving up S&P/Case-Shiller indexes even when values of non-distressed homes are falling, Chang said.

“There’s a price premium you can get from a short sale,” Chang said in a telephone interview. “That makes it look like prices are going up when they’re not.”

…

“We expect actual home price performance to weaken further,” the Morgan Stanley report said. “Our analysis was performed on May home price data, which were affected by the strong gains in sales due to the expiration of the tax credit. With the weakness in sales that has since ensued, we expect home prices to weaken as well, further contributing to the double-dip effect we can already observe.”

When Morgan Stanley says there is a premium for short sales over foreclosures, what they are implying is that the Case-Shiller weighting formula incorrectly values short sales.

Remember:

Case-Shiller gives extra weight to sales where the exact home was sold before. They use all kinds of adjustments and tweaks to try and account for overly-improved or trashed homes.

If Case-Shiller weights short sales the same as foreclosures, this would help explain why the index shows more appreciation than we actually see in the market.