Powayseller criticizes Rich’s analysis on Market Ticker

[PD]

Powayseller has been posting on Market Ticker as “Peace” (what a beautiful irony). She started a thread today on the San Diego real estate market.

Her post:

“I just checked out the piggington site, and I have a strong word of caution about the chart he uses. The median $/sq ft is another distribution number, and actually FALLS when the median RISES, because bigger homes are making up a larger percentage of sales and bigger homes have a lower price per square foot. So the more the high end market was holding up, we saw the median price/square foot falling.

I had explained this to Prof. Piggington back in late spring, and wrote a report on why the median and $/sq ft are misleading. I have no idea why he still publishes this stuff.

You cannot measure the price drops. It’s not possible. Even if you look at price changes by size of home, you will not capture it because only the beauties are now selling. The only way to accurately measure the price drops is if every home listed would be priced to market so it would sell! That is so important, that I hope everyone reads that sentence again.

But most of the homes are not priced to sell, so the buyers are bidding on the same beauties and keeping up their price, while the lower end homes and beasts are languishing on the market. Are they down 30%, 40%, 50%? We don’t know, because they are not priced low enough to sell. So the sales are skewed by the bigger homes and the beauties in a down market. In an up market, everything sold.

The best approximation of prices is the Case Shiller index, but here we lag 5 – 6 months from pending to compilation of data, and we get a composite (Oceanside is way way down but La Jolla is still up, so what good is a composite)?”

Link: http://www.tickerforum.org/cgi-ticker/akcs-www?post=8043&findnew#new

I hope some of you will chime in and defend Rich.

[sdrealtor]

The irony of it all is that 2 years ago this was my exact point (that no pricing statistic can accurately capture what is happening) and it is what PS constantly attacked me for. It is a stunning reversal to see her climbing aboard the pulpit I erected and claiming it as her own. What a joke!

BTW, unlike her I greatly respect Rich’s work and think it does have great value.

[bubble_contagion]

Would it work the other way around too?

During boom years more smaller, lower quality properties sell skewing the median down. During bust years only nicer, larger properties sell skewing the median up. Say what you want about the median but if the market corrects to levels aligned with rents and income it will have to come down. This has not happened yet.

[NotCranky]

She makes a point. Rich is a big boy he can take it into consideration or not( he probably already has). With these big Temecula and Eastlake/Otay Ranch houses falling hard it could contribute to the effect she is talking about. Conversely, sales of relatively small houses with better locations or improved ammenities could be holding the price per square foot up.Causation and correlation are tough to pin down. Maybe she can do it perfectly, deliver it sweetly, and then we will all know. That said Rich’s stuff and this blog are awesome.

I personally don’t see a need to get incredibly anal about this particular issue. Comps and same house sales cover this question well enough IMHO.

[HereWeGo]

There’s more value in the trend line than the absolute statistic.

[stockstradr]

Only one comment about Powayseller:

She is such a pathetic amateur on all topics she writes about; it is ridiculous how seriously she takes herself. (Nobody else does)

[stansd]

I think PS actually makes an excellent point. That said, Rich would certainly acknoweldge this, and doesn’t point to median/Sq ft as the be all and end all-just that’s it’s more accurate than the median.

A few months ago I ran a regression on all the houses for sale in Rancho bernardo. It confirmed what I alredy suspected, but was interesting to see it quantified: Bedrooms are more important than square footage, and the average $/sq. ft. is much higher than the marginal $/sq. ft.

Said differently, and everyone knows this just from experience, the value of a square foot getting a house from 1,200 to 1,500 square feet is much, much higher than the the value of getting it from 2,200 to 2,500.

So, PS brings up an excellent point-as the distribution skews toward the high end, this will tend to bring down the $/sq. foot. What we really need is to rely on Case Shiller data (which is more in line with the $/Sq. foot), or to look at the median price within square foot size bands.

Finally, I haven’t heard this mentioned lately-lots of houses now have granite countertop and pergo floors rather than the ratty carpet and 80s tile of a few years ago. On top of that, there is alot of cash back going on. I think it’s fair to assume that the “housing stock” quality now is higher than it was 5 years ago. Another reason why the statistics are misleading. This alone could be worth 5ppts of depreciation between 2001 numbers and now.

I would love to hear Rich’s response, but PS doesn’t have to be a narcissistic ass to start some dialogue.

Stan

[Peace]

HEY! I’m “Peace” here and I am not PS

[Rich Toscano]

“bigger homes have a lower price per square foot”

This is false. I just took the August single family home resale data and measured the r-squared between home size and home price per square foot. The r-squared was .008, meaning that there is effectively no correlation whatsoever between home size and price per square foot. I’ve done this previously as well, for both sfh’s and condos, and come up with a similar result.

In regard to the rest of her post: I have frequently written about the shortcomings of the various home price measures, including a long article at voiceofsandiego.org and ongoing disclaimers when I discuss the data. These measures are all imperfect in different ways, but they can provide useful information when analyzed in the context of their potential flaws — as I have constantly pointed out. I’m really not sure how to make these concepts any more clear.

As always, thanks to everyone for their support.

Rich

[stansd]

This is weird…I went back and duplicated the regression Rich describes above on the RB dataset I mentioned previously. My sample size is much smaller, but maybe RB is different.

I got an r-squared of 75% and a coefficient that would imply for every increase of 100 square feet, the $/square foot goes down by $11, or for every 1,000 increase in square footage, $/square foot goes down by $110 (obviously, this would change in the limit).

My dataset is much smaller and only consists of homes <600K in the RB/4S area, but I'm still surprised to get such a high coefficient when the impact for SD in total is negligible.

Rich if you have a minute and it's easy, I'd be interested to see if you reach the same conclusion if you limit the dataset to detached houses under $600K.

Stan

[Coronita]

I won't even entertain this thread beyond saying this.

 

Isn't PowaySeller the one who "predicted" S&P would be some ridiculously low number by summer 2007? Well summers over.

LOL.

 

[Rich Toscano]

You are right, Stan, when I run it only for homes priced at less than $600k, the correlation is a lot higher (r-squared = 43% for all San Diego county). But since I’m charting the pr/sqft for all houses, and there is no correlation for the dataset as a whole, I don’t think this particular issue presents any big distortions. (At least, any distortions from this issue are probably minor in comparison to some of the other distortions caused by the fact that square footage is an extremely rough proxy for overall quality — a square foot in La Jolla is different than a square foot in La Mesa, and all that.)

Rich

[stansd]

Agree doesn’t change your overall conclusion at all. Thanks for satiating my curiosity.

Stan

[Rich Toscano]

No problem, Stan — thanks for bringing the correlation at lower price levels to my attention. Good to know.

Rich

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