Real Estate – How Do We Gauge Home Prices?

The stock market has the Dow Jones Industrial Average, the S&P 500 and many sector indexes. Commodities have many indexes. Bonds have the Merrill Lynch Domestic Master.

How can we really track the performance of the many thousands of houses listed and sold (or not sold) in the United States.

Although we learned in 2007 and 2008 that, for the first time, we could have national real estate bubble in response to national real estate industry trends, home sales are still local.

Multiple listing services have the prices for local homes whether in Smalltown Wyoming or Manhattan New York City. Plus, a fair number of houses are sold by owner.

And although real estate agents can “compare” houses, they are different. Two houses in the same neighborhood may sell for the same price. The first one has an extra bathroom. But the other one has a bigger swimming pool. The first has a home theater. But the other one is in a quieter location. The first one had a more experienced real estate agent handling the sale. And so on.

The number of factors affecting a house’s final sale price are numerous and only the obvious ones are quantifiable.

However, two indexes have a go at it.

The Federal Housing Finance Agency (FHFA) puts out the Housing Price Index (HPI).

This index began with the Office of Federal Housing Enterprise Oversight (OFHEO) in the fourth quarter of 1995. But the OFHEO has been merged with Federal Housing Finance Board (FHFB) and the U.S. Department of Housing and Urban Development (HUD) government-sponsored enterprise (GSE) mission team to create FHFA. FHFA regulates Fannie Mae, Freddie Mac and the twelve Federal Home Loan Banks.

The Housing Price Index is weighted, seasonally adjusted and purchase-only. It’s calculated using sales price information from Fannie Mae and Freddie Mac conforming, conventional loans on single-family properties. This is about forty percent of U.S. mortgages.

(Therefore, it’s not a good guide for determining what’s happening in the luxury home market where prices are higher than the conforming loan limit.)

It’s based on over five million repeat sales transactions. And it’s compared with data collected by Fannie Mae and Freddie Mac since 1975. It divides the United States into Metropolitan Statistical Areas (MSA) and Metropolitan Divisions (MD) as defined by the Office of Management and Budget. It covers all nine census divisions, all fifty states and the District of Columbia and all MSAs except Puerto Rico.

The S&P Case-Shiller Index National Composite Index underlie futures contracts at the Chicago Mercantile Exchange. It’s based on a three-month rolling average of repeat sales in twenty metropolitan areas. It uses information obtained from county assessor and recorder records. But by focusing on large metropolitan areas, it captures 75% of home sales by dollar-volume. It also employs measuring repeat sales.

Fiserv Inc., a provider of IT services, is the calculation agent for the S&P/Case-Shiller indices. It goes back to 1987.

Both indexes no doubt provide a good approximation of the entire U.S. home market. However, those of us living in areas outside the twenty areas measured by S&P Case-Shiller should not depend on that to understand what’s going on in our local markets.

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