By David Mansell, president of the Utah Association of Realtors
15 March 2008 - Are U.S. home prices up or down? It would be hard to tell if you simply looked at the latest figures from two closely watched housing studies.
Two prominent home price surveys - both released Feb. 26 - each issued vastly different reports on the state of the nation's housing market. The closely watched Standard & Poor's/Case-Shiller index said U.S. home prices during fourth quarter 2007 fell about 9 percent compared to the same three months in 2006. However, at the exact same time, the Office of Federal Housing Enterprise Oversight's respected all-transactions House Price Index said prices had inched up nearly 1 percent during the same period - a difference of about 10 percentage points between the two indices.
Not only do these numbers show considerable differences on a national level, but they show variations on a local level as well.
Because the Case-Shiller Index does not survey any metro areas in Utah, I will use Seattle as an example because, like Salt Lake, Seattle has continued to see solid price gains even while other markets around the country have struggled. According to the Case-Shiller index, Seattle's home prices only rose 0.5 percent during fourth quarter 2007, but the OFHEO report shows Seattle as having a price increase of nearly 6 percent.
The reason we see such variations is because each of these indices use different means to track and calculate their data. Let's look individually at each of the house price reports that often end up in the news:
The Case-Shiller index tracks the price of single-family homes in 20 major metropolitan areas in the U.S. The index uses local property records data to track the price changes of repeat sales of the same homes. The survey also includes data for homes that were purchased with jumbo loans (those more than $417,000).
It's a fairly accurate measure of price movement in the areas covered, but since it only covers 20 major metro areas, it is not a fair representation of price movement in the entire country or in states not represented. The resulting numbers tend to be skewed because such a small sample of data is used.
In its most recent release, the index showed that year-over-year prices in the fourth quarter were down in 17 of the 20 markets surveyed. But this did not take into account Salt Lake City and many other metro areas with stable housing markets. Coincidentally, most of the 20 areas surveyed tend to be located in down markets, making current conditions around the country seem gloomier than they actually are.
The second index is put together by the government agency that regulates Fannie Mae and Freddie Mac, the Office of Federal Housing Enterprise Oversight. This index's coverage is much broader, reporting home price data in 291 local markets, rather than just 20. Like the Case-Shiller index, the OFHEO data tracks repeat sales of the same properties. The big difference between the two measures is that OFHEO does not include any information on homes priced above $417,000 nor does it include riskier mortgage products.
The most recent OFHEO data, from fourth quarter 2007, show 66 percent of metro areas experienced price gains over the year, a stark contrast from the only 15 percent reported in the Case-Shiller index.
"Too much weight is being attached to the Case-Shiller index," Charles Calomiris, an economist at Columbia University, told the Wall Street Journal. "Housing prices may not be falling as much as some economists say they are."
A third widely cited source of home price data is from the National Association of Realtors, which publishes the median value of home transactions from the Realtors' multiple listing services. The reported figures are calculated by lining up, from low to high, all the transactions that took place during the quarter and taking the middle home and its price.
Although this measure can be distorted depending on whether more low-end or high-end homes are sold during the quarter, it is a timely measure of home price activity.
Of the 150 metro areas covered in NAR's fourth-quarter 2007 data, about half had positive growth in home prices compared to the 15 percent reported in Case-Shiller and the 66 percent reported by OFHEO.
The key point is that there is quite a bit of variation in the home price data we hear about on the news. Knowing how these indices work and understanding what each measures will help you as you determine whether now is the right time for you to buy or sell a home.
Additionally, working with a local Realtor who specializes in your market will also be helpful because he or she will have first-hand knowledge and insights that no index would ever be able to provide - because nobody knows Utah real estate like a Utah Realtor.