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News & Press

September 30, 2010

Home Price Confusion Redux (CNBC)
Diana Olick

AP

Here we go again on home prices.

Every time we get this report, we also get all kinds of questions from viewers/readers about why some media outlets report it one way and some another.

So here goes:

The S&P/Case-Shiller Home Price Indices report prices in the top 10 and 20 housing markets monthly, as well as a national number quarterly. The report offers year over year percentage gains and losses, then month to month gains and losses, seasonally adjusted and non-seasonally adjusted.

Why?

In a normal world, which we currently do not inhabit, home prices vary month to month due to the types of buyers. Families generally buy in the Spring, looking to move up to bigger homes and make the move over the summer, so as not to disrupt school. Older or single buyers, also first time buyers, tend to be the majority in the Fall; they buy smaller and less expensive homes, thereby skewing the prices lower, just by virtue of what they're buying.

This is why I believe year over year is a much better indicator, since you're comparing absolute apples to apples. The trouble is that in today's world, the apples are mangled and mashed, thanks to all kinds of government intervention in the housing/mortgage market. The Feds have messed with taxes, mortgage interest rates and foreclosure inventories, which in turn make the usual seasonal shifts irrelevant. That's why this report began offering the monthly data with and without monthly seasonal adjustments.

"So in a period where only expensive houses sell, the question is not are the prices higher, but do the prices rise much faster than those of inexpensive houses?"

Davide Blitzer
Standard & Poor's

In the July report, which came out today, just looking at the 20-city composite, you see prices up 3.2 percent year over year.

This is positive, but less positive than the 4.2 percent annual rise in June. Prices rose 0.6% from June to July, 2010, without a seasonal adjustment, and fell 0.1 percent with a seasonal adjustment.

Pick your poison.

To add to the mess, this report is really a 3-month running average of home prices, so it's not just July, which means the now-expired home buyer tax credit is still factored in from May and June.

A reader asks an important question: "Wouldn't the average price of home sales rise no matter how many homes sold as long as they were higher priced homes selling instead of starter homes? Are high volume resale markets of Las Vegas, Orange County, South Florida, and Phoenix shrinking and contributing less to the final figures?"

Answer from S&P's David Blitzer: "No, not in a repeat sales index done the way S&P/Case-Shiller is done. A repeat sales index looks at all sales of all houses and calculates the annual rate of change for each house from the last sale to the current sale and then averages the rates of change. So in a period where only expensive houses sell, the question is not are the prices higher, but do the prices rise much faster than those of inexpensive houses? Our data show that in the boom it was the inexpensive houses which saw prices sky rocket, probably powered by sub-prime mortgages.

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The effect you are concerned about does occur in an index based on the median price.

In that kind of index, if only expensive houses sell, prices will rise because there are fewer cheap houses in the mix.

The index published by the National Association of Realtors is a median price index.

The advantage is that much simpler calculation."