** Intended for New Graduates/Analysts **
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| (Click on the image to enlarge) |
As indicated in prior chapters, not all price segments of the
same housing market necessarily move in tandem. In a well-distributed and
liquid market, the price escalation generally starts at the low price tier and
graduates up as the underlying market fundamentals strengthen. Therefore, in
the world of research and analytics, Case-Shiller price tiered indices are
highly sought after.
The above table demonstrates that while the Low tier (under
$395,499) registered an excellent overall growth (between January 2017 and July
2019) of 17.90%, the two upper tiers returned much lower growth rates of 13.35%
and 10.59%, respectively, and stayed significantly above the aggregate growth
rate of 12.55%. Similarly, while the Middle tier did not perform as good as the
Low tier, it did return a better growth rate
than the High tier, remaining above the aggregate growth rate
as well. Thus, the segment-wise growth rates prove that one-size-fits-all
growth rate does significant injustice to both ends of the price curve.
So what are the primary uses of the Case-Shiller price tier
indices? Here are some:
1. Time-adjust Prior Year Tax Roll Values – When
analysts and appeals consultants do not have the time or resources to develop
new market values to challenge (validate) the current Tax Roll (market) values,
the Case-Shiller tiered growth factors could be an ideal independent
alternative. Given its independence, it would be a much easier sell than some
internally developed heuristic rates. Of course, the counter case could be
compelling too: Since the Case-Shiller markets are defined at the MSA level,
the County Assessor could make a case
that such time factors are too broad-based to be meaningful at the County
(small subset) level.
2. Challenge Internal AVM Time Adjustments – AVM
modelers can use the tiered time factors to challenge the internal AVM time
factors. The Case-Shiller factors should be in line with the large subsets; for
instance, LA County time factors should be very similar to those of
Case-Shiller’s. Therefore, the internal QC supervisors, both private and
public, should additionally use these independent factors to test the metallurgy
of the internal models. Needless to say, those who develop models at the MSA
level would be the big beneficiaries of the Case-Shiller tiered time
factors.
3. To Periodically Update Mortgage Portfolios –
Mortgage portfolio analysts can use these factors to periodically update the
portfolio values, without having to develop challenger AVMs. These factors are
more meaningful when the mortgage portfolios are rolled up at the MSA or
regional level. Conversely, one must be careful in (over) using these
factors at the small subset level, unless prior studies show that those subset
factors tend to align well with the MSA’s.
4. Update a Not-so-recent Comparable Sales Pool – When
an analyst or a loan officer must work out of a not-so-recent comparable sales
pool, these Case-Shiller factors could be used to time-adjust at least the
older sales. Of course, it would be a quick fix, but not a real valuation
solution per se. This method is especially helpful in some bigger environments
(e.g., AMCs) where the time-adjusted comps are often used in batch modes, in
place of the 3rd party AVM values.
5. Enhance Shelf-life of AVM Values (sell side) – AVM houses sell their
values to wide range of end-users like banks, mortgage companies, assessment
jurisdictions, SFR rentals, REITs, large tax appeal lawyers and consultants,
hedge funds, etc. Many such AVM houses outsource the development of the modeling
and value generation to 3rd party research outfits, professors, etc.
Case-Shiller tier indices will help them to apply time adjustments and thus
enhance the shelf-life of those AVM values, easily up to a year.
6. Enhance Life Expectancy of AVM Values (buy
side) – Even the 3rd party non-custom AVM values could
be quite expensive, e.g., $5 to $10 per parcel. Given that, many end-users can
use the Case-Shiller tier indices to enhance the usefulness of the AVM values
for several quarters, thus saving a ton of money. In fact, those internally
time-adjusted AVM values, oftentimes, are very similar to the new values that
the originating AVM houses sell. Anecdotally, some tax appeal consultants use
smart college students to have their old AVM values adjusted up to the new
target date, meaning the new Tax Roll (valuation/status) date.
7. Develop Analysis for Investors – When
researchers are required to develop inter-market (across markets) comparisons
for investors, the Case-Shiller Price Tiered indices are more useful than the
un-tiered composites as these indices allow true apples-to-apples analysis.
Therefore, in order to compare two competing markets, one should compare by the
tiers rather than the overall markets, allowing investors to understand the
current valuations of each market segment; for instance, when the Low tier
makes a significant upward run, investors might shy away from that market
segment (and perhaps vice versa). So, the one-size-fits-all market analysis
does not work well for the investors.
8. Flight to Quality in Financial Markets – The
three tiered index helps smart investors and traders to swap investments back
and forth between the housing market and the equity market as the latter
comprises primarily of three price segments as well, i.e., small cap, mid cap
and large cap segments. While rotating investments, the smart investors and
traders would naturally prefer studying the competing markets by price tiers,
to avoid having to rotate from one over-valued market segment to another
similarly over-valued market segment (thus defeating the basic purpose).
9. Understand True Volatility – When
the volatility is important to the organization, developing the tiered price
volatility is critical as it does not mask the two ends of the price curve. The
above volatility table shows that the Low tier has been lot more volatile than
the upper price tiers. The reason is quite simple: the high growth (translating
to expanded price range) segment comes with higher volatility while the low
growth (resulting in more compact price range) paves the way for lower
volatility. Case in point: If the aggregate rate of 3.71% is used across a
portfolio, the volatility of the low price tier of the portfolio would be
understated while the high price tier would be overstated, thus distorting both
price segments. Of course, the middle tier would be in line with the aggregate
rate.
When the new values are not immediately available, the
Case-Shiller tiered price indices come in very handy while updating the older
portfolios, rotating investments across financial markets, and understanding
the true underlying volatility of the housing market.
P.S. These are Case-Shiller’s seasonally-adjusted indices so the
month-over-month comparison is fine. While using Case-Shiller’s seasonally
unadjusted indices, one should compare July- 019 with July 2018 and July 2017,
etc.
-Sid Som, MBA, MIM
President, Homequant, Inc.
homequant@gmail.com
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