Tuesday, July 31, 2012

Case-Shiller: A House Price Index Primer

You probably saw the news this morning:

Case-Shiller Shows Strong Price Gains in May
Home prices put together a strong run this spring. The big question now: Can housing keep up the momentum heading into the summer?

The S&P/Case-Shiller home price index showed broad price gains across the country in May. After adjusting for seasonal factors, prices were up by 0.9%, the fourth straight monthly increase and the largest in nearly three years....MORE at Developments.
Here's what it means, again from the WSJ's Developments blog:
Are Home Prices Rising? A Price-Index Primer
Look for the S&P/Case-Shiller index to post a year-over-year decline of 1% when the latest results are released Tuesday, according to estimates from Zillow.

That would be the smallest decline in two years, when a short-lived run-up in home prices evaporated after federal home-buyer tax credits expired. Prices have been in negative territory ever since, as housing markets have struggled with a surfeit of homes and anemic demand.

But price declines are easing — and several other indexes are now reporting year-over-year gains — as the supply of homes for sale has fallen sharply. Those inventory declines, coupled with a modest uptick in demand, have helped stabilize home prices.

The Case-Shiller index, along with two others, from CoreLogic and the Federal Housing Finance Agency, use what’s known as a “repeat-sales model,” which means they look only at how prices have changed for the same home over time.

This provides a more accurate home-price level than median home price data, which instead can capture a shift in the mix of homes being sold in one month versus another month.
Case-Shiller and FHFA also provide a seasonally adjusted index, which smooths out month-over-month changes that are often distorted by seasonal factors. More homes generally sell in April than, say, January, so it shouldn’t be surprising to see prices rise as sales pick up.

While Case-Shiller still reports seasonally adjusted figures, it issued an advisory two years ago saying that the adjustments were less reliable given greater variations on housing activity since the housing downturn had deepened.

Here’s a look at what other home-price indexes measure, and what they’ve shown in recent months.

What the numbers show: S&P/Case-Shiller reported a 1.9% decline for April home prices from one year ago. Prices were up by 1.3% from March, though the increase was around 0.7% after adjusting for seasonal factors.

What the index measures: S&P/Case-Shiller covers just 20 of the nation’s largest metros. It is value weighted, meaning more expensive homes have a bigger impact on the home-price reading. New York and Los Angeles alone account for 35% of the composite-20 index, both because these cities are large and because home prices there are among the most expensive in the country, according to Jed Kolko, chief economist at real-estate website Trulia....MUCH MORE