The Lesser Known Home Price Index That’ll Give You Unique Market Insight
Your forecast of future property values can have a big impact on your rental property purchase and selling decisions.
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If you’re thinking of selling a rental property this year or next and it looks like home prices will increase a lot this year, that favors selling next year. If your forecast is for flat or falling prices, however, that would favor selling this year.
And, of course, your forecasts of future home prices often factor into your rental purchase decisions.
3 Ways to Calculate Metro Home Prices
The most common way home price increases are reported in the press are as the percentage change in the median price of homes sold. This is the way the National Association of Realtors reports home price appreciation/depreciation.
Repeat Sales Index
The second most common way is the S&P Case-Shiller Home Price Index, which is a repeat sale index. That means they look at individual homes that sold recently and compare the recent sale price to the sale price the last time that individual home sold. Then they run some statistical magic on all their current and past sales data to create their index. The index is kind of funky because it isn’t in dollars and cents; however, using an index makes it easier to compare appreciation/depreciation rates between cities.
This is the least commonly seen home price index. In hedonic analysis, they take all the information they have on homes — location, size, bedrooms, baths, etc. — and run it through an algorithm to estimate the value of pretty much every single home in an area. From those individual home value estimates, they estimate the value for the area as a whole. The Zillow Home Value Index is probably the most well know hedonic index — it’s based on all the Zillow Zestimates in a given area.
- Advantage: A problem with using the median sale price and Case-Shiller Index is they’re affected by the mix of homes that are selling. If, for example, for any reason (e.g., stock market boom), more expensive homes start selling more, the median price and Case-Shiller Index will show increased home prices for the whole area even if actual home prices haven’t changed at all.
- Disadvantage: Errors in their complex hedonic algorithm can affect the accuracy of the home price index.
FNC Residential Price Index
The hedonic index I want to talk about today is the FNC Residential Price Index. FNC Inc. “pioneered real estate collateral information technology” that they sell to mortgage lenders and appraisal management companies. Their algorithm uses a lot of information from appraisals in addition to the public data that everybody else uses.
FNC publishes their index for 30 major metropolitan areas. I like that FNC makes forecasts several months out so you can see what their algorithm is thinking will happen to home prices. I don’t know, unfortunately, how accurate their forecasts have been in the past, so I take their current forecasts with a grain of salt. Nevertheless, I want to see their forecasts.
Case-Shiller vs. FNC
The FNC Index can be very different than the Case-Shiller Index. Take San Francisco.
The S&P Case-Shiller Index shows that San Francisco home prices are back to where they were at the peak of the real estate bubble in 2006.
On the other hand, the FNC Index shows that San Francisco home prices peaked a lot higher (relative to January 2000) than the Case-Shiller Index shows. The FNC Index also shows that San Francisco home prices are still about 25 percent below that 2006 peak.
A Different View
Maybe the biggest advantage to looking at the FNC Residential Price Index is that most people don’t. You might be able to glean insights into your local market that are counter to the conventional wisdom.
Investors: Which sources do you go to for market insight?
Let me know with a comment!