Thursday, July 2, 2009
The monthly S&P Case-Shiller home price index has been around since the 1980's. And it seems to be the most-followed index of housing values and is said to be the superior measure of home values in current market conditions. The S&P Case Shiller index matches sales (tracks the prices) across all types of mortgages, conforming and non-conforming. The monthly FHFA house price index (formerly OFHEO) tracks just home sales of mortgages that conform to standards (limits) set by Fannie Mae and Freddie Mac.
But it does look like the S&P Case Shiller index is becoming increasingly focused on foreclosures. Despite the fact that the metro weights for the index remain the same, the sale-pair counts are focused in those high-foreclosure areas. Hence, there is a downward bias on the index overall.
The chart above illustrates how the sales pair counts compare to their sample average (y-axis) and the associated loss in home values from the peak through April 2009 (x-axis) across the 20 metropolitan areas that go into the monthly composite-20 S&P Case Shiller home price idex. You can get the sales pairs (the matching home sales) and home value data here and see a short description of the full methodology here. Let me be very clear about the y-axis: it is the average share of sales pair counts for 2009 (January to April) minus the average share of sales pair counts across the entire sample of data for each metropolitan area in the composite 20.
What I notice is that the sales pair counts are becoming increasingly weighted toward the biggest bubble - i.e., foreclosure - metro areas: LA, San Diego, Phoenix, etc. Sales in these areas are really dragging down the overall value of the index. Presumably, the foreclosure sales are weighted less heavily, and the metro area weights are fixed in the overall index. But it is somewhat suspect to me that the share of Phoenix's housing market, for example, has increased its share of pair counts by 8.7% over its sample average, 5.4%. Therefore, there are a lot of foreclosure sales biasing the index downward.
Below is a table that relates the share of each state's stock of housing (out of the total) to the share of pair counts included in the S&P Case Shiller composite 20. For example, California owns 10.4% of the total housing stock, but currently receives a 25% sale-pair weight in the Case Shiller index.
The FHFA index is much broader geographically and incorporates the whole of the census regions (see the release here). In contrast, the monthly S&P Case Shiller index's geographic net is thinner.
The S&P Case Shiller index is most certainly a step up from the median or the mean (reported by the National Association of Realtors). But I do wonder what information it is really giving us. S&P Case Shiller is not the end-all, be-all to home price values, and probably overweights the index on foreclosure sales.