What Does the Latest Housing Data Mean for Flagstaff?

OFHEO Data As Reported in Arizona Daily Sun

Nearly every week, we have a news report on home prices in Flagstaff, Arizona, and around the country. There are several sources of data on Flagstaff home prices, and many of them lag the market by several months. That's confusing to Flagstaff homeowners, who naturally worry about the value of their homes, which, for many, is their single largest asset.

Tracking home prices is harder than tracking the price of stocks, which are traded constantly in public view on exchanges. And it's harder than tracking the price of bread or oranges. That just involves sampling posted prices on grocery-store shelves. But comparing two homes can be like comparing apples and oranges. And comparing homes from one city to the next is nearly impossible according to the old and true adage “all real estate is local.”

Last week, Flagstaff's local paper reported data from the Office of Federal Housing Enterprise Oversight (OFHEO) based on market activity that is two months old – it ended in December 31, 2007. Here’s a numerical chart of some of the data reported in the Daily Sun:

I thought it might be easier to visualize what the federal data tells us about owning a home in Flagstaff if I presented a pictorial chart. The one above dramatically shows that, according to the OFHEO data, owning a Flagstaff home that you purchased five years ago has been a really good investment!  While from 2006 to 2007, Flagstaff home prices were down about 3.5%, over a five year period – including that one year! – they are up nearly 83%. The picture shows the two years of data hovering just below the "no change" marker at the left side of the graph and the big five year gain in various markets at the top.

But what is the OFHEO data anyway? It’s one of the housing data sources most followed in the financial markets and it’s readily available to the news media. The other widely followed source of data is Standard & Poor's Case/Shiller index. Both are based on a concept, developed in the 1980s by Karl Case of Wellesley College and Robert Shiller of Yale University, which looks at repeat sales of the same houses.  As a Wall Street Journal columnist pointed out recently, OFHEO's index says home prices rose nationally by 1.8% between the third quarters of 2006 and 2007. But the S&P/Case-Shiller national index of home prices was down 4.5% in the same period. The OFHEO index showed a 2.16% increase in house prices in Chicago; the Case-Shiller index showed a decline of 2.48% Given the criteria for inclusion of homes in the index – repeat sales of the same homes – how accurate can we count on these indices being for a smaller market like Flagstaff?

Here’s another monkey-wrench in the use of these indices: The Case-Shiller methodology excludes homes that have had improvements in an attempt to account for the fact that the new buyer is purchasing a home that is really different from the home that the seller purchased. By this exclusion, however, the index eliminates the relatively attractive homes and limits its measurement to what we in real life call "outdated homes." It may also become statistically insignificant in a smaller market like Flagstaff.

There are other indices of home prices available, such as the National Association of Realtors^® data. That index presents its own problems for analysts because it reflects the mix of homes actually sold in a given month and one price range or size of home may be doing better than another in any given month. I report Flagstaff home price and sales volume data monthly in this blog and elsewhere. Even that local data has biases based on neighborhood and price range chooses made in developing the median numbers.

I have seen very few reporters attempt to provide the public with an in-depth explanation of what the index they are reporting on at the moment means. The attempt to say where the Flagstaff home market has been in the last few months, much less where it is going, is more complicated than reporting on the price trend of Apple stock, or apples in the grocery store.

The indices reported can give you a good, long-term and big picture idea. But when you are ready to buy, sell, or refinance, you need to have a professional drill down the value of your home as it stacks up against the real competition and relevant market history. I’m ready to help, when you need to sell your Flagstaff home.