| Are the Case-Shiller Indices Representative of the Average Market? |
| Written by Jonathan Smoke | |
| 10.30.2007 | |
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Discuss this article on the forums. (0 posts) The S&P/Case-Shiller indices on home prices released today that covers home prices through August painted a continuing grim picture for existing home prices in the markets covered. According to the Standard & Poor’s press release, the indices show further declines in the prices of existing single family homes across the United States, marking the 8th consecutive month of negative annual returns and the 21st consecutive month of decelerating returns. )) Click on chart for larger view Robert J. Shiller, Chief Economist at MacroMarkets LLC, was quoted as saying:
“At both the national and metro area levels, the fall in home prices is showing no real signs of a slowdown or turnaround. Year-over-year and monthly price returns are continuing to either move deeper into negative territory or are experiencing persistent diminishing returns. There is really no positive news in today’s report, as most of the metro areas are showing declining or vanishing returns on both an annual and monthly basis.”
While I don’t doubt the representativeness of the Case-Shiller indices for what is going on in the markets they cover, it is a bit of a stretch to say that the composite indices are representative of the national housing market. And that of course requires you to actually believe in a “national housing market.”  The 10-city composite and underlying MSAs represented are the basis for the housing futures traded on the Chicago Mercantile Exchange. If I were to cherry-pick markets to get housing futures going, I would pick markets of sufficient size and volatility to make the futures far more valuable. I wouldn’t be picking markets based on their ability to represent the whole country.As a test of just how representative these Case-Shiller markets are of the other 341 MSAs in the U.S., we took the Housing Price Risk Index that we use in our Housing Prospects Index Report and compared the Case-Shiller markets with the rest of the markets. The Home Price Risk Index measures the relative likelihood of existing home price declines in a specific market. The index is created using a Monte Carlo simulation to arrive at a probability that a future price, in any quarter over the next five years, falls below the most recent quarter value. Markets where the price is more likely to drop are scored as more risky and thus given a lower Home Price Risk Index score. On our most recent report, the average MSA Home Price Risk Index score is 44.7. The average for the 20 Case-Shiller markets is 32.6. The average for non-Case-Shiller markets is 45.4. So, the 20 covered Case-Shiller markets are almost 24% more likely to see price declines than other markets. If I look at only the original 10 cities for which futures are actively traded, I almost couldn’t hand pick a better group of MSAs for the worst possible pricing risk. The 10-city composite average Home Price Risk Index score is 22.5, so they are almost 30% more likely to see price declines than other markets. While most markets do have significant inventory pressures and a corresponding pull-back in ownership-driven demand that are causing prices to stagnate and in many cases fall, it is likely that Case-Shiller’s much-covered set of indices represents not the average but the worst conditions for home prices. Unless you live or invest in one of these markets, I would recommend judging your home prices by another measure. 
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