| The Good and Bad of Case-Shiller Indices |
| Written by Christina Weitzman | |
| 09.03.2008 | |
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Discuss this article on the forums. (0 posts) An article from the Chicago Tribute that I read in our Housing Economics news section grabbed my attention with the title, The case for—and against—Case-Shiller index. It seems that we’re not the only ones who think the Case-Shiller index has limitations in aptly assessing the housing market. “The S&P/Case-Shiller home price indexes are based on value comparisons over time for the same house. That is, a sale is included if it can be compared to a prior transaction. That way, there is no need to try to control for changes in a home's characteristics, such as a new kitchen or a room addition.
[….] But, according to a recent study by the American Enterprise Institute, a conservative think tank, Case-Shiller […] value-weights its transactions, which the institute contends, gives too much credence to very high-priced houses and not enough to the lower end of the spectrum. Charles Calomiris, the co-author of the study and a professor in Columbia University's business school, also argues that the 20 metropolitan areas covered in the often-quoted Case-Shiller index skew it toward more dramatic price swings. In other words, says Calomiris, "Case-Shiller is biased toward bad news." [….] The institute also notes that the "headline-grabbing" Case-Shiller index has no data from 13 states that represent 11 percent of the nation's housing stock and only partial coverage of 29 others, which account for 79 percent of the housing stock. Moreover, the areas overlooked appreciated at a slower pace in the housing boom and are less likely to see large swings downward. "All of this implies that the Case-Shiller index is constructed to be particularly sensitive to what is happening in very high-priced homes in the largest, highest-priced markets," Calomiris contends.” Of course, there’s the flip-side to consider. The Case-Shiller indices aren’t all bad, according to Mark Zandi of Moody’s Economy.com: “He says the index does a better job than most other measures of house prices because it reflects activity in the credit markets.
As Zandi points out, a quarter of all homes sold in the first quarter were "distressed sales," foreclosures or short sales. In some places, he argues, three of every 10 houses that change hands do so at fire-sale prices. [….] Still, the chorus of Case-Shiller detractors grows, especially among housing trade associations, which maintain that prices are a local phenomenon. So drawing a conclusion from just 20 markets paints a false picture.” Luckily, our subscribers can draw conclusions about local markets using our Market Reports. With the August editions of our HousingIntelligence Market Reports recently published, a local enhanced subscriber can immediately download information on one of 939 statistical areas. And National subscribers have access to all 939 metropolitan and micropolitan statistical areas of the country from Abbeville, LA to Zanesville, OH. Click here to subscribe today. 
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