Saturday, October 5, 2019

Case-Shiller Housing Index vs. Condo Index – A Good Champ-Challenger Market Analysis

Champ-Challenger analysis is an excellent way to provide a validation of one’s primary research. If the local housing market is the focus of the primary research, the competing Case-Shiller indices from the condo market could offer an excellent challenge in the form of validation. This comparative approach – housing index versus condo index – from the same collective market also provides readers with a context to better understand the primary stats. In valuation analysis, unchallenged stats leave a void which technical valuation experts like the valuation modelers often fail to come to terms with. Here are some specifics:    

1. Presenting the Components – While analyzing and reporting on the status of the local single family housing market, it’s prudent to provide separate and competing analysis of the components – single family residences (SFRs) separated from townhomes (including PUD/HOA) to condos to coops, etc. Instead of combining all of them as one category and averaging the results, component-level analysis would make more sense as their underlying demand characteristics are usually different, often resulting in vastly variant market behavior. Therefore, the Case-Shiller comparative approach could offer an excellent market analysis without having to recollect all the atomic level or rolled-up data. 

2. Diverging Components – Aggregate demand is not necessarily the best way to present a particular market, especially when the components do not move in tandem or diverge significantly. For example, the Condo market generally leads the housing market – on the way up, as well as on the way down. So, in presenting the analysis of a residential market where the component growth factors are at variance, it’s better to present the Case-Shiller housing index as the Champ while the Case-Shiller condo index serving as the challenger, thus clearly portraying the divergence. A combined picture would simply musk the on-going reality. In fact, this is a classic mistake many local reporters tend to make.   

3. Power of the Challenger – The Challenger analysis is nothing but a validation exercise. When the Champ is meaningfully challenged (validated), the study becomes inherently more meaningful and statistically more significant, considering they are mined off the mutually exclusive and competing market segments. Therefore, where the Case-Shiller condo index is available, it’s prudent to use it so as to enhance the impact of the overall analysis. That is why the Property Tax Appeals consultants often hire well-known AVM consultants to develop a challenger AVM to unearth the over-valued parcels on the tax roll. The same concept applies to the other major markets, e.g., challenging a sector Mutual Fund with a competing ETF or a country analysis in emerging Europe with BRICS, etc. 

4. Single Parameter Champ – An unchallenged single parameter champ like the month-over-month median SFR sale price analysis is inadequate (it is necessary but not sufficient) to make informed business decisions. It needs to be challenged both "intra" and "inter." Since the Case-Shiller indices are normalized and corrected (via regression analysis), the intra and inter analyses are significantly eased. The internal housing or condo analysis (Median Price per SF) could be compared with Case-Shiller’s housing or the condo index (as the case may be). Conversely, the ideal “intra” analysis could be the Case-Shiller condo index as it is a competing component (sub-market) of the overall housing market, thus leading to the highest and best analytical use of the overall market. Builders often challenge the market approach with market-adjusted cost approach.

5. Reducing Market Noise – Normally, the SFR and condo markets remain in sync. When they diverge, one needs to investigate the reason. Since the condo market often takes the lead, either way, it could be tell-tale, pointing to the beginning of a new market swing; for example, if the condo market starts to trend up, SFRs and Townhomes won't be far behind. When they diverge for a long time, one must run the Case-Shiller housing vs. condo test to find out if the market internals are diverging. If not, it could be the "monthly" aberration. The 2-Month Moving Average helps reduce the monthly noise. These are the basic tools one must initially apply in diagnosing the reason for market divergence. If the basic tools are unhelpful, a step-by-step regression model could point to more precise reasons.

6. Challenger Condo Model – If one is forced to build a challenger (regression) model for the condo market, one must remember that the condo modeling is different from the SFR modeling. Condo modeling can be top-down or bottom-up. It’s good to avoid top-down modeling as it involves income modeling requiring hard-to-find condo complex-level income-expense data. Since condo sales are at the unit level, the bottom-up market modeling is more common. In addition to the unit-level condo sales data, market modeling does require data related to the unit-level property attributes, complex-level amenities and general location, which are available on county assessment sites. Under serious time constraints or If the condo data are not easily accessible, the Case Shiller condo index could provide a meaningful or, at least, a stop-gap challenge as the index includes all of the aforesaid data components.    

7. Apples-to-apples comparison – The SFR market tends to be more homogeneous than the condo market. Granted, there are Waterfront Mansions, French Tudors, Brownstones, etc. in the SFR market, they do not necessarily form the norm. On the other hand, condo markets routinely comprise low-rise, mid-rise, high-rise, skyscrapers, etc. with significantly different amenities. So, one needs to know the apples-to-apples comparison; for example, in NYC, only the low-rise condos are grouped with the SFRs in the same tax class, easing the comparison. In suburban markets, it is prudent to remove the high-rise and skyscraper condos from the sample. Of course, if one is using the Median Sale Price or Median SP/SF, a handful of high-rise condo unit sales would not skew the results. Instead all of dealing with these competing and time-taking data issues, one can simply use the Case-Shiller index to challenge any third party condo analysis.

8. Data for External Analysts – While collecting the data, an external analyst must know that, now-a-days, a vast majority of counties (where the population level data originates) make at least the sales data available on their sites (as a customer service so the property owners can develop their own comparables analysis and validate the market values on the tax roll). Additionally, it’s prudent to choose a county that makes the property data elements like Bldg SF, Land SF, Year Built, etc. available, in case one needs to develop the normalized tests and/or the regression model. Of course, when one has ample time for the project and is undertaking it for the institution, one would be better off buying the data from a national data vendor with many more data variables. On the other hand, if one does not have the necessary time to build the model bottom-up, one can simply use the Case-Shiller index as the potential challenger, saving a ton in terms of data cost and time.

9. Using an External Challenger – Last but not least, it’s good to compare the internal results with S&P Case-Shiller's indices. The Case-Shiller monthly housing indices are available for the 20 major markets (MSAs), both seasonally adjusted and unadjusted. Since the internal analysis is generally seasonally unadjusted, the comparison must be made with Case-Shiller’s unadjusted indices. Similarly, if the internal analysis is already seasonally adjusted, it must be compared with Case-Shiller seasonally adjusted index. Obviously, since the Case-Shiller indices are available in both forms, they provide much wider range of analytic and modeling opportunities to analysts and researchers. Of course, they also come with many copyright restrictions, so the comparison should always be shown in the report with full disclosures and be used for non-commercial purposes only.

Again, a good Case-Shiller champion-challenger analysis is self-selling and more convincing as the challenger would do most of the selling.

Sid Som, MBA, MIM
President, Homequant, Inc.

Link to the Book
How Case Shiller Indices Have Taken Over Housing Data Analytics (and How You can Benefit from them) 

Homequant Offers Case-Shiller Champ-Challenger Market Analysis

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