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The puzzle of home price indexes

U.S. home prices declined 15.3 percent, 8 percent or 4.6 percent from April 2007 to April 2008, according to Standard & Poor's, the National Association of Realtors and the U.S. government, respectively.

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If you're puzzled by that sentence, you're not alone. Home price measures have been front and center this year as home values have fallen across the country, but amid all the uproar, very little attention has been paid to the startling discrepancies among these three measurements of house prices or the implications of this conundrum for home buyers and sellers.

"The State of the Nation's Housing 2008," a report from the Joint Center for Housing Studies at Harvard University, sums up the situation thus: "It's difficult to gauge with certainty how far home prices have fallen. Each of the three measures most commonly used to quantify house price trends paints a different picture of the magnitude of declines to date."

Which index is which?
This state of confusion has resulted in large part because home price indexes use different sources of data, types of homes, geographical territories and statistical methodologies to estimate how much home prices or values have increased or decreased over time. The differences in all respects are highly technical, but here's a quick cheat sheet of the various indexes:

Home price indicators
The S&P/Case-Shiller Home Price Indices
Rely on county title records, tax assessments and other public records.
Match up and weight the prices of repeated sales of the same houses.
Focus on 20 metropolitan statistical areas, or MSAs, around the country.
Include single-family homes, but not condominiums or new-built homes.
The National Association of Realtors' median prices
Use data from surveys of Multiple Listings Services.
Track median (i.e., middle of a list) home prices, rather than weighted repeat sales.
Separate single-family homes and condos into separate measures.
Don't include most new-built or for-sale-by-owner homes.
The Office of Federal Housing Enterprise Oversight, or OFHEO
Use data from Fannie Mae and Freddie Mac.
Include sales prices associated with new mortgages and appraisals performed for refinance mortgages.
Match up and weigh the prices and valuations for the same properties.
Include condominiums and new-built homes, but fewer high-priced homes.

"The NAR series isn't an index, so it doesn't have the level of abstraction that the others do," says Danielle Hale, a research economist at the NAR in Washington, D.C.

Home price figures are general, not specific
So which of these measures is the most accurate, timely and relevant? Housing market analysts and economists have been engaged in a lively and largely inconclusive debate this year over just that question. The important takeaway for homebuyers and home sellers, however, is simply that, as the experts have pointed out, each of the indexes has its own peculiar strengths and weakness.

For practical purposes, these observations are pertinent:

  • National indexes, though widely reported, may have the least relevance for individual home buyers and sellers, notes David Blitzer, managing director and chairman of the SP Index Committees at Standard & Poor's in New York City. "If you look at a national index, it's not going to tell you what's going on in your neighborhood," he says.
  • Instead, the most relevant statistics for most people will be those that are localized to a specific geographic area, according to Andrew Leventis, a senior economist at OFHEO in Washington, D.C. That may sound helpful, but one metropolitan statistical area may be comprised of multiple counties that can cover hundreds or even thousands of square miles. Moreover, the Case-Shiller Indices, to take one index as an example, don't include any data from a dozen or so states that include one of 20 specific MSAs.
    Next: "If you want to make predictions ... look at fundamentals ..."
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