| S&P Case-Shiller Home Price Indices May Be More Negative Due to Foreclosures |
| Written by Jonathan Smoke | |
| 04.29.2008 | |
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Discuss this article on the forums. (0 posts) Standard & Poor’s released the February Case-Shiller Home Price Indices today. The headline reading is that home prices were down in February 12.7% over the prior year. That reading was from the 20-city composite. Their original 10-city composite was down a record 13.6%. “There is no sign of a bottom in the numbers,” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor's. “Prices of single family homes continue to drop across the nation. All 20 metro areas were in the red for the February-over-January reading. In addition, 19 of the 20 MSAs are still reporting negative annual returns. The monthly data show that every one of the MSAs has now declined every month since September 2007, marking six consecutive months.”
There is no doubt that we remain in a wide-spread housing downturn as sales are down, other readings of home prices are down, and inventories by almost any measure in these major markets are higher. That said, the Case-Shiller Indices may be casting a more negative reading of home price declines because of the currently high rate of foreclosures. I believe that the repeat sales methodology might be more likely to pick up a greater portion of foreclosure sales as the second sale in a pair. Therefore, the sample of home sales used to derive the index reading will represent more foreclosure sales than normal sales and will thus be more negative than mean, median or price per square foot readings would indicate. Here’s why I think this. Bank sales of foreclosed homes are part of the home sale population from which S&P/Fiserv calculate the indices. I am hypothesizing that most of the foreclosures occurring are on homes bought and financed in the first half of this decade while subprime financing expanded significantly. Furthermore, since the Case-Shiller methodology expressly applies greater weight to shorter historic intervals between sales, if my hypothesis about foreclosures being more recent purchases is correct, then by definition the Case-Shiller indices will reflect more negative declines than other measures. Moreover, the Case-Shiller indices are likely reflecting declines that are more severe than are really occurring across the broader property transaction database. It would be great to inspect and test this assumption, but thanks to the monopolistic and ridiculous way that the more granular Case-Shiller index data are licensed, there’s no way for me to prove it. But I will stand by my logic. 
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