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The puzzle of home price indexes

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  • Price trends can differ by not only area, but also price range and type of property, Leventis says. The OFHEO index, again to take one as an example, may be less useful in pricey housing markets, such as parts of California and Massachusetts, because the agency's data doesn't include most homes financed with a jumbo mortgage. The effect of that limitation may have lessened somewhat due to the temporary increase in Fannie Mae's and Freddie Mac's conforming loan limit, which used to top out at $417,000 in all areas. Median home prices, in particular, can be subject to seasonal variations or shift due to the mix (i.e., more or less expensive) of homes sold.
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  • The best of use of home price indexes is not to figure out the price of a specific house, but rather to obtain "a very general understanding of what has happened with prices in the local area" and, to the extent possible, get "a sense of a ballpark range of how much you might pay for a property" in that area, Leventis explains. Houses are unique and differ from one another in terms of not just price, but also location, condition and desirability.
  • "You can use (a home price index) as a board or general tool, and one piece of information in the panoply of data to determine the appropriate price for a home. It's certainly not determinative of what, exactly, a given home's value is," he says.

  • Tracking house prices over time is very difficult to do with extreme accuracy, particularly when dramatic shifts have occurred in the housing markets, according to Leventis. Home prices indexes are statistics, and as such, they suffer from inherent limitations of data collection and analysis.
  • House price indexes are historical, not predictive, though home builders, lenders, institutions that own securitized mortgages and other sophisticated investors can trade housing futures tied to some of the Standard & Poor's Case-Shiller Indices on the Chicago Mercantile Exchange to hedge against housing market risk.
  • "Trying to use the house price index to predict what the house price is going to be tomorrow is like trying to predict the weather tomorrow based on the weather today," says Hale. "If you want to make predictions, you need to look at fundamentals like job growth and income growth that will give you a forward-looking perspective."

    Why home-price indexes are out of sync
    That leaves what Leventis calls the "million-dollar question," which is: Why have the three measures of home prices veered so far out of sync?

    The question isn't easy to answer, in part because the indexes use proprietary formulas to complete their calculations, but economists believe geographical coverage, types of homes that are included and different weighting methodologies account for some of discrepancies, Hale says.

    Another culprit, especially in the gap between Case-Shiller's and OFHEO's findings, may be the effect of subprime or "creative" mortgages at the lower-priced end of the housing market, according to Blitzer and Leventis. (Leventis' January 2008 paper, "Revisiting the Differences Between the OFHEO and S&P/Case-Shiller House Price Indexes: New Explanations" may be of interest to statistically inclined readers.)

    The bottom line is that if you want to figure out how much home prices have declined in a particular neighborhood, you'll need to choose your statistics with care and be aware that all of the measurements have their own shortcomings. There's no doubt that home prices have declined in many U.S. cities and regions, but by how much is still an open question.

    Bankrate.com's corrections policy -- Posted: July 24, 2008
     
     
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