Who really knows if the price is right?


If you follow real estate at all, you know that there are 3 pricing indexes that get quoted fairly regularly – S&P Case Shiller, FHFA, and Corelogic HPI.  Are they good for tracking home prices as a buyer or seller?  My belief is no – a professional Realtor is your best option.  All of these indices are flawed from what they track, to the timeframe in which they use to track data, to what their data sources encompass, to how much weight is given to price points and to what areas are used to gain their pricing policies.  Why is this important to know you may ask?  Well, it is where your clients, sphere, and potential clients hear in the media about housing prices.  You need to be able to speak intelligently about them and convey the true story about housing prices.  By doing so, you will position yourself as a trusted resource in real estate by providing value to those whom you know.  Now, let’s take a closer look at each pricing model so you can give the right advice when you are helping a client buy or sell a house.

Here is what you may not realize about the S&P/Case Shiller Home Price Index:

  • The index was developed for Wall Street to hedge the housing market, not as a monthly consumer metric
  • Based on a 3 month moving window of closed sales which washes out the annual seasons in housing
  • Lags contract signing dates by 5-7 months
    • Translation:  Q1 2011 report = Q3 2010 Contracts
    • Based on prices, not sales activity where sales activity may be trending
    • Comprised on single family sales only.  Excludes: condos, co-ops and new development sales
    • Only represents 20 cities nationwide
    • Washington DC covers a large area of which includes:
      • Calvert, MD
      • Charles, MD;
      • Frederick, MD
      • Clarke, VA
      • But these areas also included:
        • Warren, VA
        • Jefferson, WV

This is NOT what most readers of the Washington, DC data understand the coverage area to be.

The CSI reported with a two-month lag and is based on three months of data.

  • For example, data released in January 2011 was for the three months ended November 2010 (November, October, and September 2010).

 Understanding the FHFA HPI:

  • The House Price Index is based on transactions involving conforming, conventional mortgages purchased or securitized by Fannie Mae or Freddie Mac – only. All mortgage transactions on single-family properties are included – refinances included but no condos, coops or multifamily are considered.
  • Conventional mortgages are those that are neither insured nor guaranteed by the FHA, VA or other federal government entities.
  • The HPI is a weighted, repeat-sales index, meaning that it measures average price changes in repeat sales or refinancing on the same properties.
  • A full release is provided every three months – not exactly timely.
  • The HPI includes indexes for all nine Census Divisions, the 50 states and the District of Columbia.

The best of the rest – CoreLogic.

The CoreLogic HPI provides a multi-tier market evaluation based on price, time between sales, property type, loan type (conforming vs. nonconforming), and distressed sales.  The CoreLogic HPI is a repeat-sales index that tracks increases and decreases in sales prices for the same homes over time, which provides a more accurate “constant-quality” view of pricing trends than basing analysis on all home sales. The CoreLogic HPI provides the most comprehensive set of a monthly home price indices and median sales prices available covering

  • 6,507 ZIP codes -  58 percent of total U.S. population
  • 611 Core Based Statistical Areas -  86 percent of total U.S. population
  • 1,119 counties -  83 percent of total U.S. population and
  • Located in all 50 states and the District of Columbia.

 The CoreLogic HPI is published on approximately a 5 week lag from the end of the data collection period.

How does the FHFA HPI differ from the S&P/Case-Shiller Home Price indexes?

  • The S&P/Case-Shiller indexes only use purchase prices in index calibration, while the all-transactions FHFA HPI also includes refinance appraisals.
  • FHFA’s valuation data are derived from conforming, conventional mortgages provided by Fannie Mae and Freddie Mac. The S&P/Case-Shiller indexes use information obtained from county assessor and recorder offices.
  • The S&P/Case-Shiller indexes are value-weighted, meaning that price trends for more expensive homes have greater influence on estimated price changes than other homes. FHA’s index weights price trends equally for all properties.
  • The geographic coverage of the indexes differs. The S&P/Case-Shiller National Home Price Index, for example, does not have valuation data from 13 states. FHA’s U.S. index is calculated using data from all states.

As you can see, it is nowhere near how we value properties but it is where most of Americans get the idea of housing values.  We have more accurate, up-to-date information that we can provide clients.  Let your clients know why these indexes are made available – CSI, for Wall Street and hedge funds;  FHFA HPI, to track valuations on Freddie and Fannie products to assess risk;  and lastly, CoreLogic’s HPI, for banks to assess risk when lending money.  None of them are used to determine the value of a home when selling or buying – let others know the facts and become a source for valuable real estate information.  Get it?  Got it?  Good!

Now, go sell something!

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