Considering the Case for Case-Shiller

By Alan Aptheker, AllRegs Marketing and Communications Coordinator, April 2, 2012 Standard & Poor’s Case-Shiller Index, or S&P/Case-Shiller, is a national home price set of indices that measures the average change in the total value of all existing single-family homes, in the aggregate, in the U.S. Karl Case, Robert Shiller and Allan Weiss developed the Case-Shiller Index in the 1980s to come up with a more meaningful metric with respect to housing prices, that is, better than a basic monthly snapshot.

We look to the Case-Shiller Index to gauge how the housing market is doing. But how does it do it, and in the end, what does it really say? The Standard & Poor’s website explains the report in detail, but here we break down the purpose and content of the report in much simpler terms.

The index includes 23 items in its measurements: an analysis of 20 large metropolitan areas, and three composites – that’s data processed by a complex algorithm − all melded together − to arrive at National, 10-city and 20 city numbers. Put all 23 things in the mix, and you get the S&P/Case-Shiller Index. Every month, you can see changes in the relative value of residential real estate represented by a single number. For example, at the end of January, 2012, it was down 1.3 percent. One can only “infer” from the data what’s really going on; the index has its good points and things to be aware of as you are looking at the data.

Point #1: The Case-Shiller Index is better than just a monthly snapshot because it compares one month to another. It’s based on a three-month rolling average; that is, at the end of every month, you take the monthly averages from three months ago, two months ago and last month, average out the averages, and you get a three month rolling average. Thus, the data is two-months old. The 1.3% reported in the news in January 2012 was the three month rolling average calculated at the end of November, 2011. The data is massive, and it takes this long to accurately calculate.

Point #2:  It is based on real numbers, not projections or estimates. They use actual public filings and it is based on closings. It only counts the actual sale of an actual house. Not what we think it might sell for, or when it might sell, but what the price was at closing. So when you think about it, it is not based on one price of a home. It is based on two prices of the same home, or apples to apples. It compares the first sales price to the resale price; hence, the home must be sold twice to be included in the Case-Shiller Index source data.   

It is important to note that using the actual, official sales data misses some things that could be important to the trending of home sales – it doesn’t count property transfers between family members. It skips over transactions where the property type changed (e.g., properties originally recorded as single-family homes that are later recorded as condominiums.) The Case-Shiller Index does not include prices for new construction, co-ops and apartments or multi-family homes. What about when two parties agree on the price, sign a contract, and it doesn’t close for another three months? Not counted in the data.

Point #3: A sales contract can implode before closing, and still, it will only be counted by the index when it actually closes – when the deal is really done.

Conclusion: The Case-Shiller data is great to look at over long periods of time to see long term trends. Like a 3-D picture with that “hidden” image, if you stare at it long enough, you begin to see the shape of things.  

SOURCES:

Mortgage Daily News, Jan 31, 2012 “Case-Shiller Reports Continued Erosion in Home Prices” http://www.mortgagenewsdaily.com/01312012_home_prices_case_shiller.asp

Yahoo finance: the Business Insider, Jan 31, 2012 “The Case-Shiller Home Price Index Has A Major Deficiency That Almost No One Talks About.” http://finance.yahoo.com/news/actually-case-shiller-home-price-051734300.html

Wikipedia: http://en.wikipedia.org/wiki/Case%E2%80%93Shiller_index

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