The puzzle of home price indexes
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.
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
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
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.