House price data

Today’s economist chart :

This shows the widely quoted case shiller index.

As always applying the data lens to this : there is some significant risk of bias here. My understanding of the index is they look at value weighted percent changes in registered houses from period to period within each of a basket of representative cities.

That misses a couple of things :

1. New homes

2. Added value of renovations (although I recall reading they seek to remove those from the sample)

3. Inter and intra city mix shifts

With so much riding on home prices, there are more options out there … such as … however just like with credit scores (with FICO) there is a widely understood although perhaps inaccurate norm that is quoted in the popular media that seems to serve as the benchmark for most decision makers.

With vertical disintermediation (such as secondary markets for mortgage backed securities) it seems there is even more of a tendency to rely on summary metrics – perhaps this is just practicality. Economists talk of vertical integration being caused by, among other things, very high cost of contracting. In secondary credit markets this seems to exist – e.g. there are contract terms around mortgage prepayment risk and securities tranched by average FICO. I’m not sure if they have terms related to widely used indices like case shiller – but it wouldn’t surprise me. Accounting for the inaccuracies in these measures counts as a high cost of contracting. In fact since data is a competitive advantage for the security originator, it might even be a case of the paradox of information (you can’t contract for it without giving away the ‘secret sauce’).

With these considerations being only exacerbated by increasing data sources, are we going to see the most profitable US banks – heaven forbid – staying veritically integrated, and even securitizing less than they otherwise would?

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