Just What in the Heck is an S&P/Case-Shiller National U.S. Home Price Index?
Sarah Green’s November wrap-up article last Friday reminds us that another real estate quarter has closed, and that deserves some analysis. In particular, we wanted to explore the The Standard & Poor's Case-Shiller Home Price Index as it recently updated at the end of November. This index, considered the most accurate measure of America’s home prices, always creates buzz in the industry, and this quarter is no different.
But before we dive into this 3rd quarter report, we thought we’d take some time to explain what makes Case-Shiller different from other home value measuring tools; after all, this source is considered the best measure on the market. So, if you’re fairly new to the game of real estate, you too want to use Case-Shiller data; but to do that, you have to understand Case-Shiller in the first place.
Case-Shiller home price indices come in many flavors: A national home price index, a 20-city composite index, a 10-city composite index, and twenty individual metro area indices.We’ll focus for now on the S&P/Case-Shiller National U.S. Home Price Index, though on Wednesday we will explore both single-family home prices and condo prices as reported by Standard and Poor (S&P). The S&P/Case-Shiller National U.S. Home Price Index tracks the value of single-family homes in the United States to create a composite of single-family home price indices for each of this country’s nine U.S. Census divisions. The data are calculated quarterly, so this Wednesday we will be looking at the data for Quarter 3, which closed at the end of September, 2011.
The Difference is in the Construction
The National Home Price Index was constructed to better “track the price path of typical single-family homes located in each metropolitan area provided,” in S&P’s own words.
What then makes the S&P/Case-Shiller National U.S. Home Price Index more “accurate” than say, for instance, one prepared by the Federal Housing Finance Agency (FHFA)? Because the FHFA does produce a quarterly Housing Price Index, which it calls, aptly, its HPI. The HPI has much value for those of us tracking the market, but it also has its limitations.
A summative measure single-family house prices, the HPI is a weighted, repeat-sales index that “measures average price changes in repeat sales or refinancings on the same properties in 363 metropolises.” The feds, with help from the likes of Fannie Mar and Freddie Mac, cull these statistics by reviewing repeat mortgage transactions on single-family homes with mortgages that have been purchased or securitized federally since 1975. But since the HPI index only includes houses with mortgages within the conforming amount limits, the index has “a natural cap.” That means it cannot account for jumbo mortgages, a loan product that recently changed its definition: In the wake of real estate’s collapse, the government, says Property Wire, “lowered the jumbo mortgage cap from $729,250 to $625,500 in its effort to move out of the market to make more room for private lenders.” And that means a large portion of homes left out of analysis.
Meanwhile, The Case-Shiller index prices are measured monthly to track repeat sales of houses using a methodology devised by Karl Case, Robert Shiller, and Allan Weiss and don’t cap, irrespective of mortgage amounts. Wikipedia chronicles this fabled team’s efforts:
“Case developed a method for comparing repeat sales of the same homes in an effort to study home pricing trends….. using data from house sales in Boston in the early 1980s, which was going through a housing price boom. While Case argued that such a boom was ultimately unsustainable, he had not considered it a bubble…... Case sat down with Shiller, who was researching behavioral finance and economic bubbles, and together formed a repeat-sales index using home sales prices data from other cities across the country. In 1991, Weiss, performing graduate studies under Shiller, persuaded them to form a company, Case Shiller Weiss, to produce the index periodically with the intent of selling the information to the markets.”
Today, that information allows us to see the “growth in value of real estate by following the purchase price and resale value of homes that have undergone a minimum of two arm's-length transactions.”
Hold on if you just got confused anew. Fiserv nicely explains those “arm’s-length transactions” and which data come into calculation and which don’t:
The principal variable used for index calculation is the price change between two arms-length sales of the same single-family home. For each sales transaction, a search is conducted to acquire information on any previous sale of the same property. If an earlier transaction is found, the two are paired and considered a “repeat sales transaction.”
Each sales pair is examined to eliminate factors that might distort the calculations, including:
- Non-arms-length transactions (transfers between family members)
- Substantial physical changes to the property
- Transactions where the property type designation has changed
- Suspect data
So, changes in house types/sizes/physical characteristics aren’t include the calculations to avoid incorrectly affecting the index value. Then, home sales pairs are “accumulated in rolling three-month periods to offset any delays in sales data recording and to keep sample sizes large enough to create accurate price change averages.”
More Telling than Medians or Averages
Ultimately, The Case-Shiller index of home values is very different from average sale prices or median homes prices because both of these measurements only show us what was actually sold on the market. If lower priced homes are selling more, then the average sales price clearly adjust down, though there may still be many properties selling at much higher prices. Meanwhile, the “median price” is simply the middle price of a particular type of property sold. The Case-Shiller Index, calculating repeat properties sold, with and without seasonal adjustment, point to the true value of homes on the market at any given time, creates a better indicators of said values.
Even if the Case-Shiller is more in-depth and thus more “accurate” than other measurements, it can’t predict or even report on a specific neighborhood. The report is macro: a measurement of major metropolitan areas. But what about micro-markets? People don’t buy houses in metro areas. They don’t really even buy them in individual cities within a metro. They buy them on a single street, in a single neighborhood; and we all know how different one street’s home values can be from another—even one block can be more valuable than another. So keep in mind, even when an metro area posts a decline on the Case-Shiller Index, you know that (almost always), some local communities within that metro have done well, some have held their value, and some have declined. Even Case-Shiller is no substitute for the help of a local agent who can help you know what’s really happening with home values on the street you hope to live.