The S&P Case-Shiller Home Price Index
January 4, 2008
Post Tags: Case-SHiller-Report , S&P-Home-Price-Index
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The S&P/Case-Shiller Home Price Index report gets a lot of press coverage each month when it comes out. But does anyone you know including yourself take the time to find out what the data reporting criteria is for this report? If you don’t know the basis on which the conclusions are being drawn then you don’t understand the results of what is being reported. Most major media outlets are counting on this.
Let’s start 2008 looking at a couple of these reports that come out and are often quoted. It will help each of us understand better what we are reading.
It can also make you the voice of reason the next day at work when everyone is quoting from some bad new in the real estate market report. While they are playing into the bad news game you can say, “But did you know that if you own your home for a long period of time it is downgraded in the report?”
This quote is from the Standard & Poors Case-Shiller Home Price Indicies Factsheet.
“Index Construction
REPEAT SALES PRICING
The S&P/Case-Shiller Home Price Indices began as a research
project in the 1980’s when Karl E. Case and Robert J. Shiller
began to construct a methodology to measure housing price
movement. They mastered the repeat sales index technique,
now widely considered the most accurate way to measure
valuation changes in various U.S. housing markets over time.
The methodology measures price movements by collecting
data on sale price data pertaining to individual single-family
homes within each geographic market comprising an index.
When a specific home is eventually resold, the new sale
price is matched to the home’s first sale price. These two
price points for a specific home are called a “sale pair.”
The difference in the sale pair is measured and recorded.
All available sale pairs within the geographic market being
measured are then aggregated into one index. Sales pairs are
carefully screened for any data points that would distort the
index such as foreclosures, non-arms length transactions, and
suspected data errors where the order of magnitude of the
change is substantially different from others in the region.
WEIGHTING OF SALES PAIRS
The indices are designed to measure the change in the price of
homes that have not undergone significant changes in quality.
Sales pairs are assigned weights to account for fluctuations
in price that can be attributed to factors like extensive home
remodeling, adding a home addition, or extreme neglect. For
example, the indices assign smaller weights to sales pairs
with large change in sales price relative to the community
around them. The assumption is that this change is due to
remodeling or neglect. Sales pairs are also weighted based
on time intervals between sales. Sales pairs with longer time
intervals are given less weight than sales pairs with shorter
intervals to account for the probability of physical changes.“
From the FAQ
“2. What types of homes are included in the index calculations?
To be eligible to be included in the indices, a house must be a single-family dwelling. Condominiums and co-ops are specifically excluded. Houses included in the indices must also have two or more recorded arms-length sale transactions. As a result, new construction is excluded.”
From the Methodology Documentation
“Time Interval Adjustments. Sales pairs are also weighted based on the time interval between the first and second sales. If a sales pair interval is longer, then it is more likely that a house may have experienced physical changes. Sales pairs with longer intervals are, therefore, given less weight than sales pairs with shorter intervals.”
“Initial Home Value. Each sales pair is assigned a weight equal to the first sale price to ensure that the indices track the aggregate/average value of all homes in a market.”
What we need to know when reading the Case-Shiller Index
- New Construction and it’s impact on the RE Market is not included.
- Condo, Townhomes, Co-ops Mulit-family residences ARE NOT INCLUDED.
- Sales of homes with in a 6 month period are not included.
- If you have held onto your home for a period of time the weight of the sale is diminished in value.
- Homes must have been sold at least TWICE before they are included in the index.
- The monthly index is based on a three month rolling total (whatever that means)
What this means to the Tucson Market
- This is strictly about Single Family Residences that have been sold at least twice, but not with a six month period.
- If you have lived in your home for a period of time that is not disclosed, but probably longer than two years the value (weight) of your transaction is downgraded because there is the assumption you might have made upgrades to the property.
- Based on the Market dynamics over the last three years and the de-regulation of the mortgage industry the way the data for the Case-Shiller is pulled is not very relivant considering it was written on a 1988 dynamic which is now 20 years out of date.
In other words, when you read reports in the paper quoting the Case-Shiller index on the housing market it is best to move on to the next article. You won’t really get any information that is useful for todays market. It is an out of date reporting methodology.
Finally you can get to all of these PDF files from this page at Standard & Poors concerning the Case-Shiller Report
February 12th, 2008 at 12:02 pm
Case-Shiller is the best index for managing the complex real estate data. Yes, it has to make certain assumptions, but trust me it better than anything spewed by NAR and their promoter Lawrence Yun and his predecessor Lereah.
I love how you seem to completely discount Case-Shiller index and allude that Realtors are the only ones who have the accurate pulse of the real estate market. Sorry, but the spin is not working.
February 12th, 2008 at 12:12 pm
raspberry3,
I would recommend you read this post again. First it is simply stating the shortcomings of the Case-Shiller report. It is a good report, but not the way the media uses it. They use it for data that isn’t provided in the report then draw conclusions.
There is no where in this post that even remotely alludes that Realtors are the only ones who have an accurate pulse on the real estate market.
This is a conclusion you can not draw from this post or blog. The Case-Shiller needs some updating to reflect the market. Those assumptions it makes are not based on the real estate market in this country today, but uses a 1980’s model.
The only spin is in your comment. All this post it doing is pointing out the basis for the Case Shiller report and what is not included. Then a link to the site to get the current reports is provided.
There is no mention of NAR, Lawrance Yun etc. In this post. I have no use for the data or reporting coming out of NAR.
If anyones bias is showing it is yours.
March 22nd, 2008 at 3:17 pm
You seem to have quite a negative opinion about Shiller-Case. It is a very good statistical methodology for tracking the prices of existing homes.
Do your job and let the statisticians do theirs.
March 22nd, 2008 at 5:19 pm
Alan,
You are welcome to your opinion but I think it needs some updating to prove a valuable tool for todays economy and real estate market.
That is all I’m trying to point out. That and the blind media quoting the Case-Shiller report as if it were some kind of Housing Gospel.
I think I (at least I tried) to give a fair representation of it’s shortcomings based on todays real estate market.
March 25th, 2008 at 10:31 am
David, which housing index do you feel most accurately portrays the current state of the housing market?
March 25th, 2008 at 11:06 am
Brian,
The Case-Shiller is the best we have. But it needs updating. The reason I wrote this post in the first place is to show those area where the report is deficient for today as an accurate metric.
It has some very good data and analysis, but as noted there are some things that keep this report from providing better snapshot of what is going on in the nation’s real estate market.
October 1st, 2008 at 3:50 pm
I would like to revise my above comment to Brian after a personal conversation with Andrew Waite of the Personal Real Estate Investor Magazine. He pointed out to me that each of the 20 cities in the report only have 300 homes in the index. All the conjecture of this report is based on the transactions of 300 homes. Here is his comment on the post The Personal Real Estate Investor Magazine.
1. Andrew Waite (1 comments.) Says:
August 27th, 2008 at 10:41 am e
David: Thank you. I am relatively new to real estate from varying business backgrounds (lawyer, technology sales and systems integration) and publishing technology and investment magazines. We then discovered real estate. We apply normal business measures and find a lot of weird results.
Try this: Wall Street measures 100% of the market each day to update indexes. Residential real estate measures .05 of the total stock each month to impute market value and update market performance indexes.
Any statistician would laugh you out of the room with such an error prone fractional sample, yet the world hangs on every word from OFHEO, Case/Shiller and NAR with a blind traded asset measurement and reporting approach to non-traded assets. “Perishable oranges to Wax apples, indeed.”
Thank you for your great words. Thanks A