Gap GaugeTM: Notes and Glossary Notes: The Gap Gauge is an easy-to-use tool that is intended to facilitate basic technical analysis of the housing market cycle. The tool's framework reflects several simplifying assumptions, e.g.: A premise that the housing bubble began January 2000 in each market, and that (a) the degree of annual price growth, and (b) the relationships between prices and rent, and between prices and income after January 2000 were universally abnormal and unsustainable The average annual appreciation rate for each housing market prior to the year 2000 was its "normal" growth rate All data are in nominal terms (i.e., not adjusted for inflation). It is worth noting, for example, that average annual growth rates, when extrapolated from a period of "normal" inflation rates into periods of below-normal inflation rates, may have the effect of elevating baseline index and breakpoint levels. None of the images or data comprising the Gap Gauge should be construed as a market forecast. For Dallas and the Composite-20 S&P/CS Home Price Indices (each of which data series begins in the year 2000), this tool applies the bubble-adjusted growth rate of the U.S. National index. The S&P/CS U.S. National Home Price Index is a quarterly data series. For the purposes of this tool, monthly data points are created for the historical series using simple interpolation. All plots and statistics within this tool are based upon index data as revised by the sources over time. ______________________________________ Glossary: Baseline Index Levels (S&P/Case-Shiller Home Price Indices) The actual index levels are used for the baseline trend through 1999; from January 2000 forward, baseline index levels are created by extrapolating the (pre-2000) historical trend using the Bubble-Adjusted Growth Rate. These baseline index levels comprise the baseline trend (the red line within the chart). Baseline Index Levels (Price-to-Rent, Price-to-Income, and Price-to-GDP Indices) Starting in January 2000, the baseline index trend is grown monthly by the Bubble-Adjusted Growth Rate. Bubble-Adjusted Growth Rate (S&P/Case-Shiller Home Price Indices) The default bubble-adjusted growth rate (“BAGR”) is the mean YoY% change from index inception through December 1999. Gap Gauge users can change the default BAGR to a rate of their choosing, which will produce a different Gap measure. For those indices with limited historical data (i.e., Dallas and Composite-20), the default BAGR is set equal to 3.58 (the default BAGR for the S&P/Case-Shiller U.S. National Home Price Index). Gap (Actual Index Level - Baseline Index Level) / Actual Index Level Inflation-Adjusted Gap S&P/Case-Shiller U.S. National Index, interpolated monthly, less month-over-month % in U.S. Consumer Price Index. The Consumer Price Index is based upon data reported by the U.S. Bureau of Labor Statistics. Mean Pre-Bubble Ratio (Price-to-Rent, Price-to-Income, and price-to-GDP Indices) The mean level of the index from inception through December 1999. Price-to-GDP Index The ratio of the S&P/Case-Shiller Home Price Index Level to U.S. GDP Nominal Dollars (SAAR) . The U.S. GDP index is based upon data reported by The Bureau of Economic Analysis Price-to-Income Index The ratio of the S&P/Case-Shiller Home Price Index Level to the U.S. income index level. The U.S. income index is based upon data reported by the U.S. Department of Commerce. This data is not currently available for individual metropolitan markets, thus, the U.S. income index is used to derive each of the Price-to-Income data series. Price-to-Rent Index The ratio of the S&P/Case-Shiller Home Price Index Level to the rent index level for the selected market. The rent index is based on CPI Owner's Equivalent Rent data (as available for certain individual metropolitan markets) as reported by the U.S. Bureau of Labor Statistics. The U.S. rent index is used to derive the Composite-10 Price-to-Rent data series.