Your forecast of future property values can have a big impact on your rental property purchase and selling decisions.

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

### Median Price

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.

Related: The Investor’s Roundup of the Best 2016 Real Estate Market Forecasts

### 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.

### Hedonic Index

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.

Related: BiggerPockets Real Estate Investment Market Index: The Best (and Worst) Major Markets for Real Estate Investors, 2015

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!

John is a real estate numbers geek. He’s an economist who stumbled into becoming a real estate agent when people visiting his wannabe Zillow website (created 4 years before the real Zillow website!) started asking him to show them homes for sale. John has been quoted in The Washington Post and The International Herald Tribune. His newest venture, RealEstateDecoded.com, teaches non-investors about the home buying and selling process.

1. Great article. I like the data. General public is becoming more informed everyday about such market insights…Of course, .If I am selling, I want to use the highest index or analysis available. If I am buying, I want to use the lowest. Of course everyone understands the agents/brokers will hammer the final deal in some room behind closed doors and in the end it gets down to poker. Who is going to hold and who is going to fold. These days it would appear the unmeasured index is the emotional, psychological and behavioral science behind it all when it comes to true market value.

• That’s a good point. In negotiations you pick the index that supports your position. At least, it might add doubt to the other side of the table.

2. Thank you for your article, John. I’d never heard of the FNC before. A few different indexes to look at when making these hugely important to sell or not to sell decisions will help up all the more!

• Thanks Steve. And FNC may not have an “Everything is Awesome” bias like NAR.

3. Hey John, thanks so much for this article. I’m a bit of an economics geek, too, so it’s great to see another index to use as a tool for investing decisions.

• Thanks for the comment, Isaac! I appreciate it.

4. Thank you John. One more tool under my belt.