S&P/Case-Shiller & Other Home Price Indices – Do They Matter to a Homebuyer?

The Standard and Poors/Case Shiller Housing Index tracks changes in housing values in twenty large metropolitan regions. The Index releases monthly data so that economists can crunch numbers and make their predictions on where they believe the general economy is heading. However, there are different ways to measure the change in housing values and the Case-Shiller method, Zillow's, and others do have some flaws. Nonetheless, S&P/Case-Shiller it is one of the measures heavily reported by the media and considered a barometer of housing prices. Let’s talk about the methodologies, if it is useful information for a homebuyer, and what was reported today.

The S&P/Case-Shiller Home Price Indices may be a fair gauge on past historical data about housing price changes. Realize that past performance is no indication of the future, so that is the first limitation. Additionally, it only measures changes in single family home housing prices, not condominiums, apartments, co-ops, or commercial properties. Each of these different types of real estate can perform differently, which really clouds the whole picture depending on what an observer is interested in learning. The Indices also only measure price changes on houses that have past sales data. It measures the price change from a prior year sale versus a sale in the most current month, and reports that data. This ignores any value changes in the property that may be attributable to rehabilitation or construction on the property. Therefore, there are a lot of limitations overall with the data.

Other Indices like the Zillow.com Home Price Index measures changes in housing values based on “computed based on proprietary statistical and machine learning models.” Zillow uses a model to determine the “ideal home price” of all homes in the area based upon the actual sales of homes in the area. Models, of course, can be incorrect, but with a large enough pool of data the results should “gravitate toward the mean,” which means they should be close to market averages.

And still other indices measure house price changes calculated simply off the sales prices of actual sales that took place compared to the prior month or year, and sometimes calculated on a per-square-foot basis. They can also be calculated just on homes or condominiums, in different pricing ranges, by zip codes, etc. But these can also be flawed in case the composition of home sales changes each month. One month it could be weighted upward because lots of expensive houses sold, another month it could be downward because more moderately priced houses were sold. As you can see, each index has limitations.

The person or company using the data needs to determine which Index they feel is appropriate for their use of the data and if they believe the calculations are accurate. Economists use this data to make predictions about the future marketplace. Often, however, for every one Harvard economist that predicts the future is bright, there is one Yale economist who predicts that the future is dim. This just makes it tougher for users to think through the data and make useful decisions based on that data. And corporate hiring, interest rates, and business spending are all impacted by this data, as well as the analysis of the data by economists and company management.

For potential homebuyers, you might ask yourself if this is relevant to a real estate purchase decision? Luckily, this data and short term housing price changes should really be irrelevant to your home buying decision process. Much more important is that you plan to own the property a long time. A decade from now, when the property you buy in 2012 is worth considerably more than you paid for it, you won’t even remember anything about house price indices changes. You’ll just gloat to friends about your brilliant market timing!

Additionally, mortgage financing interest rates are at historical lows, around 4.0% for a 30 year fixed interest rate loan at Wells Fargo. That makes buying real estate the most affordable it’s been in decades, if not in the history of owning property! If your hope is to time the market in hopes prices may drop a little, you may be sorely disappointed if mortgage interest rates increase before you purchase. To add to that, prices in general are very low and with low interest rates that creates some very good buying opportunities in the marketplace. Some properties are even less expensive, on a monthly basis, to own instead of renting. That alone is reason to buy and an incredible change from just a few years ago.

So what did the S&P/Case-Shiller Index report today? That overall prices dropped about 4.0% from a year ago and they are down about 1.0% from the prior month. These reported facts definitely could impact the economy based on what corporate managers decide about the future and where they plan to spend money. This could impact hiring, manufacturing, and the economy overall.

But if you are considering buying a home, and are in a financial position to buy one, you’d be much better off ignoring the indices and calling a local real estate professional, going to open houses, and starting your buying process. It truly is a great time to buy property, as it has been the past few years, and short term housing price fluctuations shouldn’t be a concern of yours.