Why Case-Shiller Is A Bit F***ed

Paul, my friend, this is for you as it references Brentwood and is something to think about in your search.  Interesting but sound reasoning from a person with a more colorful venacular than myself, ok we are cut from the same rug.  Please note the title and the website contains profanity but the article is good nevertheless.-Sean

As the old Real Estate aphorism goes “Only 3 things matter – location, location, location”.  So the issue with relying on Case-Shiller (which has been “growing” for three months – yippity f-ing doodah!)  is that the “city” used for valuation is usually a multi-county location with each location being at a different stage in the price cycle.  The “San Francisco” area ranges from Pacific Heights to the Brentwood suburbs over 55 miles away.  Brentwood may have bottomed but it will take some time for the Silicon Valley and the “City by the Bay” to follow it into the abyss.  Oh and by-the-way Silicon Valley, typically considered Santa Clara county, is not actually in the index.

The recovery that Case-Shiller has been talking about is allowing the far out suburbs to mask further falls in the inner-core. The net result is, as Case-Shiller recovers, people closer to the namesake city buy too soon under the false pretense that their little pocket of the world has improved with the broader index.  Ironically those in the exurbs will now do better than those closer to the city named in the index.

How will prices in the inner core eventually fall into the abyss?  Simple migration.  The cheapest areas will draw from their neighbors (Brentwood from Dublin) lowering the prices for the neighbors as well (as Brentwood represents a “substitute” in classic economic parlance).  Those now lower price neighbors will then draw from their neighbors one step closer to the inner core (Dublin from Castro Valley) drawing down the prices there.  This will then continue  as such – Castro Valley from Fremont, Fremont from Mountain View and finally Mountain View from Palo Alto.  In the end nature abhors a pricing vacuum and one currently exits in the exurbs.  It will take some time before it really sucks here in Palo Alto.  But it will suck!

The net-net is the worst place to buy right now is anywhere near the city named in the index.   Oh and if your not actually in the index then purchase at your own risk.  You say you live in the “San Francisco” area but remember that it is a spiritual and not a statistical distinction according to Messrs. Case and Shiller.

To add to the scary (and highly varied picture) take a look at this chart which shows how wildly different the valuation story is WITHIN  the “San Francisco” area:

http://www.housingbubblebust.com/OFHEO/Major/NorCal.html

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