Commentators speak of numerous broad housing indicators and indexes tracking property values across the nation. However, Real Estate, unlike Stocks and Bonds, are not fungible. Properties are non-homogenous and are affected by both broad economic macro and local micro factors. Due to market inefficiencies, the usefulness of data derived from these broad indicators is limited.
Constant Quality vs Traditional Valuation Measures
In compiling housing stats, people typically look at several factors including overall volume, average price, number of bedrooms and baths, and price per sq ft, while adjusting for seasonality. Data from all homes within a certain property type or market area are included. Issues arise when homes of greater/lesser quality, size, or type are sold within a given period of time. The average price of a typical four bedroom home might appear to rise when in reality, the houses sold in the past year were significantly newer/renovated or of higher quality.
Constant quality indexes have been used to measure the change in prices of the same house over a period of time. Certain steps are taken to minimize the effect of sales of improved homes and homes sold between relatives. While this appears to give more accurate results, several issues remain. The role of new construction within a market area and buyer migration can skew results.
OFHEO and the S&P Case/Shiller Index provide quality control data
The Office of Federal Housing Enterprise Oversight compiles data on conventional conforming mortgage transactions from the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae). The House Price Index (HPI) utilizes a modified version of the weighted repeat sales methodology proposed by Case and Shiller. The benefits of OFHEO’s HPI are that the data utilized encompasses a broad stream of data and includes additional areas that the S&P Case/Shiller Index leaves out.
The data source for the Case/Shiller Index is derived from Public Records while the HPI utilizes data from single family residential property with at least 2 mortgages originated and subsequently purchased by either Freddie Mac or Fannie Mae since Jan 1975. It is important to keep in mind that data on multi unit, attached properties, government insured loans, and property exceeding conforming loan limits are excluded. This index is updated quarterly.
It would be prudent to look at broad market indicators and statistics published by the S&P, OFHEO, and the National Association of Realtors, understand the different methodologies in which they analyze their figures, and then investigate the myriad of factors that influence a property both from a macro and micro level.
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Article Author: Anwell TsaiAnwell has written 16 articles for us.
Visit Anwell's Website: http://www.ValuationHome.com
Anwell Tsai, a Realtor for Real Estate One, grew up in the Real Estate business. Anwell is extremely interested in analyzing property from a variety of viewpoints, utilizing different financial models. He explores various issues in Real Estate on his blog at ValuationHome.com. When he is not out looking at homes, Anwell, a conservatory trained violinist, loves expressing his creative side through the joys of music.
Joshua Dorkin
{ 8 comments… read them below or add one }
Anwell Tsai,
Thank you very much for making this post. I believe that many people do not understand how the real estate indices work nor do they understand the inherent inaccuaracies of each index. Some of these overstate changes in pricing and others under state changes in pricing.
I think that a couple of us that understand these indices should get together and write a post or series of posts on how to analyze these indices. This could possible be of great use to the public or at least of value to real estate professionals.
I am just amazed at the number of real estate agents that do not understand the problems with using the Average home sale price to gauge price changes.
The IAS360 House Price Index is the leading house price index in my opinion: http://www.iasreo.com/ias360update.html
It is a comprehensive housing index tracking monthly change in the median sales price of detached single-family residences across the U.S. The index, based on all arms-length transactions, tracks data at a “neighborhood” level, which is then rolled up to report on the changes in 360 counties, nine census divisions, four regions, and the nation overall. The IAS360 House Price Index is delivered on a monthly basis.
I think creating a forum or a series of posts on different indexes and their methodologies would be quite interesting. Each index gives a different perspective on data and understanding how they are compiled is critical.
Thanks Dan for the comment about the IAS360 Price Index. Maybe we should compile a list of indexes that people find useful. There are quite a few out there.
The list compilation would be a great idea, Anwell. Maybe you could do that for next week?
I second to “Thank you very much for making this post. I believe that many people do not understand how the real estate indices work nor do they understand the inherent inaccuaracies of each index. Some of these overstate changes in pricing and others under state changes in pricing.”
Just an FYI: IAS360 House Price Index for September data will be released on Tuesday, November 11th. You can check it out by visiting: http://www.iasreo.com/ias360update.html
Quick tidbit, the IAS360 comes out much earlier than Case Shiller, that is one of the key benefits of this index.
Sure, i’ll write about a few other indexes in next week’s blog. If anyone has an index they like, please post it here.
We appreciate this info from a mortgage perspective as well. The more I can learn about housing trends the better IMO.