First the good news: The April 2011 Case-Shiller Index (the most current index available) states that US home prices are on the rise and that it’s the first time in eight months since home prices have increased. Hooray! But what does this really mean? Let’s review this question along with a few other questions I get regarding this index.
What is the S&P Case-Shiller Index that I keep hearing about each month?
The Case-Shiller Index was designed to measure home price appreciation/depreciation by examining homes which have sold at least twice (called the repeat sales method). This will automatically exclude new home sales so we are only talking about re-sales. The index also includes properties that were taken back by a bank, then resold back into the market place (referred to as REO sales and foreclosures). An attempt is made to exclude homes that have undergone significant changes since the last time it sold. STOP right here! This is absolutely the right thing to do but how anyone can do this correctly for tons of data in 20 cities across the country every month is beyond me. You certainly cannot rely on government data (like tax assessor records) to tell you what has changed in the interior of a home, where most changes typically occur. Homes get remodeled all the time and foreclosures get vandalized all the time. Even local appraisers who go out and look at houses sometimes get this one wrong. Consider the following scenario which happened to me recently: An appraiser used a non-renovated dilapedated house that sold, as a comp for my subject property which I had renovated. To add insult to injury, the old tear down, which sold for pennies on the dollar, was later renovated and the picture that the appraiser used in the report looked great. (…and yes he kept it as one of his comps, even after I explained what had happened). Was this house used in the Case-Shiller Index as well? It sold at least twice…once at an inflated (mortgage fraud) price, later as an REO sale at pennies on the dollar.
Will the Index be influenced by foreclosures/REO sales?
Probably so. After all, it does include bank sales. Throughout the country foreclosures are running about 30% to 50% of all transactions, and that number excludes short sales. How many damaged REO sales are used in the index? The answer is…I don’t know. Each month the index figures are released to the general public, but not the actual sale transaction samples used to calculate the index.
Does the index accurately reflect the entire MSA?
Probably not. And how could it? For example, Atlanta is about 100 miles by 100 miles and covers 28 counties. How can one number accurately reflect an entire region this large where home prices vary from $10,000 to several million dollars?
Can you compare the Index to average or median selling prices?
Not really. I know a lot of people attempt to do this but don’t forget, the index was created using homes that have sold at least twice. The average or median selling price reflects all properties that have sold, regardless of when it may have last sold.
Stop looking at single metrics. The Case-Shiller Index can definately play a role in understanding “some” pricing trends. However, when trying to determine the real estate health of a city/town or even the Nation, today, more than ever before, you have to look at each market in very small /small bite size pieces. The first commandement of Real Estate 101 is location. Knowing the local dynamic and influence on a market is paramount and includes more components rather than one paired sale metric.
Note: For more information about the Case-Shiller Index please see their methodology at www.standardandpoors.com