How to better measure home prices?

As shown in the previous post, the median price is far from an ideal measure of home prices. In this softened housing market, a change in the types of houses sold may give people a deceiving picture of increasing prices. Here is an article titled The Follies of Measuring Home Prices from Rich Toscano.

In short, the median house is really a moving target, and the “median price” does not account for the difference in these houses and is therefore subject to the following follies:

  • Changes in who’s doing the buying
  • . If only the rich are still buying the beachfront properties, we may see the median price increasing sharply in a declining housing market.

  • Changes in what buyers are getting for the money
  • . “During the boom, as buyers reached the upper limit of what they could spend, they compensated for the lack of affordability by lowering their standards and buying less desirable homes. So for a couple of years, there, changes to the median price actually understated the extent to which individual home prices were increasing. Since the boom ended, the opposite has happened. Now, the extent to which buyers have been able to get more and more bang for their homebuying buck has not been entirely reflected in changes to the Median purchase price.”

  • Home improvements
  • Seller concessions
  • . The above two have been covered well in the Media, which may value tens of thousands of dollars but not included in the median price.

One of the best solutions lies in the Case-Shiller Home Price Index (HPI), which measures market price changes based on repeat sales of individual homes. Here is a graph featuring a comparison between Median Price and Case-Shiller HPI on San Diego’s housing market.

Looking at the Median Price (the red bars), you may think that San Diego’s Housing market hit the bottom b/w 09/2006 -11/2006 and rebounded back this year. However, CS HPI (the blue bars) shows a consistent decline throughout. Which one is correct? Correlating with sales volumn, we known the latter is the true picture.

For more metro areas and longer periods, you can plot graphs on the http://macromarkets.com.

To get individual home value and neighborhood demographics, I found http://www.cyberhomes.com/ very useful.

Do we want to play Liar’s Poker? Notes 1

I found two books listed most frequently as favorite books among PF bloggers — Liar’s Poker: Rising Through the Wreckage on Wall Street and A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, Ninth Edition. I felt a bit embarrassed that I did not know these two books, though I had thought about getting a job in Wall Street. I decided to make up my ignorance.

I finally got the two books one month after I placed holds on them. By then Yannick and I got very busy with our work. So we decided to optimize our times — each read one and exchange reviews.

Yannick likes numbers, so he got the “Random Walk”. I am more fiction or biographic type, so I picked “Liar’s Poker”.

The first thing that struck me was the author’s comments on “economics”. He noted that, although most arrivals on Wall Street studied economics, the knowledge was never used – actually, any academic knowledge was frowned on by traders. Economics is not really a science, but rather a means by which investment bankers find potential candidates to hire.

This sounds like Michael Spence’s model of job market signaling. I always considere it a drawback in signaling game — Education is useless other than being a signal to the potential employer. Now Liar’s Poker confirmed this assumption with a real life example. I guess that this was one of the very few cases where the assumptions of an economics model hold true in reality. Unfortunately, instead of increasing my confidence in my economics education, it makes me even more disillusioned with the economics knowledge I got from PhD classes.

On the other hand, the book gave us a relief. As the book says, most millionaire traders started their trading business in their early 20’s. We had some sort of regret that we missed the opportunity to be there. Given that I have so many friends working in investment banking, I can’t (or do not want to) believe that the life in Wall Street is like the “jungle” the book described. However, I doubt that the way the IB sales traders and people make money has changed much. They consider it a success by deceiving the less-informed public and ripping off their clients. I do not think that Yannick will ever be able to do this. So this may not be the road for us anyway.

The book also talked about Michael Milken’s junk bond empire. It is interesting to see a different view on Michael Milken from Den of Thieves

My comment on paying for Grad School

I started reading more and more on personal finance blogs, and found this “Moomin Valley: Personal Finance, Investing and Trading” really interesting. And since I had such a long, bitter experience in graduate school, I can’t help commenting. I got emotional there. But I just can’t help. And I can’t help posting here in my own blog too.

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At 6:43 PM, Jacqui said…

My husband and I share similar experience with you, and I agree with you that paying for graduate school is not a very good idea.

As you can see from our blog http://latestarters.blogspot.com, we started everything late (including blogging), partially due to the graduate student life. Going for PhD was a bad investment particularly for me, becuase I ended up with 3 masters:(

Even though I got full funding for all my 6 years in graduate school (in fact, I had 50K in saving by living frugally and saving every penny from the stipend and RAship), thinking of the opportunity cost, it is definitely a terrible investment.

I think that the worst thing of being in a PhD program, particularly in top school, is that I was “brain-washed”. I felt that nothing was worthwhile other than writing a paper. I will get an A in financial economics, and put all my money in savings account, because I do not really have time to study the real financial market.

Now I am back to real life, and the things I learned in graduate school are not of much use on the job market. I thought I could look for a job in finance, but found out that I am too old. Those I-bankings or hedge fund would rather have a fresh BA with good math “intuitions” than hire an old “ABD” who can only derive some “trembling hand perfection” equilibrium (what a wired name!)

I hope it will be better for my husband. At least he got his PhD. But he is in a different filed. He has to go through postdoc, which means minimum wage for another year or two 😦

Maybe I should encourage my husband to work in Industry. But then we get our visa problem. It might be easier to get green card if he stays in acadmia. He could have applied long ago, but…… he was brain-washed too…..

Yes, overall, I agree that it is not a good investment to get a PhD, unless you really feel passionate about it, or you feel that you can get Nobel Prize, or it is in Finance, law, medicine….

I do not really regret coming for the PhD program. That was the only way I could get funding. I just regret that I did not realize that I was not the academia type. I regret that I did not wake up early when I was suffering.

I guess that I get a little emotional here. Hopefully time will eat my bitterness away soon.