Monday, July 25, 2011

MARKET TRENDS: What Can Home Owners Learn From Case-Shiller’s Home Price Index?

The S&P/Case-Shiller Home Price Index released its monthly report this week, with less than surprising results. April’s home prices for the 20 U.S. cities comprising the index dropped 4% year-over-year despite a slight 0.7% uptick from March to April. The uptick can be chalked up to the fact that April marks the beginning of the high season for home buying. It’s the first national price increase in eight months.

Financial markets rely on and respond to the data released by this index, for example crude oil prices moving higher yesterday in response to the latest report’s news. But how important is Case-Shiller’s price data to homeowners?

I’d argue not very, since prices reported in the index are well over two months old. In an uncertain housing market like this one, those prices change every month and there are more factors than ever contributing to them. So how does Case-Shiller’s data stack up against other home price indexes and what can homeowners glean from it, if anything?

“Barring the nuances of different methodology and data sets, the overall picture remains the same,” says Dr. Alex Villacorta, director of research and analytics at Clear Capital, a Truckee, Calif.-based real estate research firm. Clear Capital releases a Home Data Index that demonstrates price changes up to the week before the report is issued. When the company released its April data (in early May), they reported a 5% decrease year-over-year, compared to Case-Shiller’s 4% decrease.

One reason for the one percent difference is the fact that Case-Shiller applies a larger weight to more expensive homes and a lesser weight to less expensive homes; Clear Capital applies an equal wieght across all price points, assessing percentage changes regardless of price rather than looking at total property value. Another reason is the fact that Case-Shiller’s indices are 10-City and 20-City Composite Home Price Indices, meaning the report focuses primarily on the 10 and 20 largest U.S. metro areas. Clear Capital crunches data for several hundred metro areas as well as sub-zip code boundaries, meaning a much larger data pool.

Villacorta suspects Case-Shiller’s numbers, which also reflect the first month-over-month price increase in eight months, will reflect similar results to more up-to-date home price indexes as the summer months plow on: “We’re [Clear Capital] seeing overall prices level off and we’ve been
seeing that since the last month or so, that the steep declines off of winter were starting to correct, losses starting to soften and that overall prices seem to be on the trajectory to flat line or even turn up.”, a Seattle, Wash.-based real estate listing site, releases a home price index as well, usually a month and a half behind the market. So April home price numbers were reported the first week of June. Zillow, like Clear Capital, covers a spectrum of cities in the Zillow Home Value Index — 200 metro areas to be exact. Zillow’s April numbers paint a grimmer picture than the other two reports: 0.8% drop in values month-over-month and a 8% drop in values year-over-year. For the 20 cities tracked in Case-Shiller’s Indices, Zillow reports a 0.4% decrease month-over-month compared to Case-Shiller’s 0.7% increase.

Stan Humphries, chief economist at Zillow, says that the two indices are in agreement as far as broad trends go. Both showed a pickup in home price depreciation rates following the end of the home buyer tax credit programs in 2010 and now, both are seeing those depreciation rates slow down and improve. “We are seeing higher depreciation than Case-Shiller but our 0.4% is still an improvement from the 2010 number just as Case-Shiller’s is,” explains Humphries. Clear Capital’s data shows the same larger trend.

Other differences in methodology adding to the disparity between Zillow’s numbers and Case-Shiller’s are the fact that Zillow looks at valuations for the entire housing stock. Case-Shiller looks only at homes that have sold at least twice and excludes new construction. Zillow also analyzes median home prices, taking into account all of the homes that sell at any given time. This allows for more granular data for home owners, but it also poses a problem for economists.

“So a median sales price will go up if more high-end homes are selling than lower end homes, which makes it more difficult for economists to look at…that’s where the Case-Shiller comes in,” says Humphries. “They actually created that index to try and correct for that by looking at sales pairs and its much better than median sales price index.” Even so Case-Shiller is still susceptible to changes in the mix of what’s selling. (Humphries goes into this further here.)

So here’s the deal with Case-Shiller: for economists, analysts and market traders looking at macro trends in the sector, it’s useful; for home owners looking to see how your local housing market is faring, it’s not. Check out real estate listing sites like or, a San Francisco, Calif.-based site for more localized data and local home comparables. Trulia even tracks local price reduction trends like percentage of properties with price cuts, average discounts and average number of days before a cut.

As for the housing market and what home prices are doing nationally right now, Clear Capital, Zillow and Case-Shiller are all saying generally the same thing, despite offering slightly conflicting home price numbers. The home buyer tax credits pushed prices up a bit in 2009 through 2010. When they expired, prices dropped down past 2009 lows in response during fall and winter. After a rough start to the high selling season of spring and summer, due to weather and other outside variables, that price drop is slowing down and stabilizing. You can expect prices to drop further this year, but those drops will be less dramatic than we have seen in the past. A housing market recovery will come, but we’re anywhere from a year to three years off. In the meantime, we are close to or bouncing along the bottom in most markets.

Morgan Brennan Forbes Magazine June 29, 2011

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