Posted July 28, 2014

Flawed Case-Shiller Index Shows Home Values Climbed Through Even Slow Winter Months

Case-Shiller Index : Home values rising at a slower rate as compared to 2013

Case-Shiller Index : Home values rising at a slower rate as compared to 2013

Standard & Poor's Case-Shiller Index reports another annual home value increase in last year, highlighting what many of today's home buyers have found out the hard way -- the housing market continues to expand.

Homes are markedly more expensive as compared to last year. The shift has helped existing homeowners to refinance to current mortgage rates, but rising values have done little to help U.S. buyers. Large downpayment or no downpayment, homes are more expensive in 2014.

At least mortgage rates are down. Today's rates remain south of 4.5%.

Click to skip to today's live mortgage rates.

Case-Shiller Index : Las Vegas, San Francisco Lead Recovery

Standard & Poor's recently released its February 2014 Case-Shiller Index. The index tracks home price changes from month-to-month, and year-to-year, in select cities nationwide. Tracked cities include San Diego, California; Los Angeles, California; and Phoenix, Arizona.

As compared to the month prior, home values rose in just 7 of the 20 tracked markets in November, led by a 0.8 percent gain in Portland, Oregon. Seattle, Washington was the next biggest gainer, adding 0.6 percent month-over-month. 

On an annual basis, the Case-Shiller Index showed broader improvement.

All 20 of the Case-Shiller Index-tracked markets gained during the twelve months ending December 2013. Las Vegas and San Francisco led all cities with annual gains of 23.1% and 22.7%, respectively. San Diego ranked third at 19.9%.

The "weakest" of the Case-Shiller Index cities was Cleveland, Ohio, followed closely by New York City.

Homes in the New York City region -- comprised of Manhattan, Brooklyn, Queens, Staten Island, and Yonkers -- gained just 6.1% in value, on average, since November. Against the national average of 12.9 percent, this is less than half.

However, take care to not use Case-Shiller Index data for your personal "buy or rent" decisions. The monthly index is flawed and may push you toward an improper conclusion.

The index's first flaw is its most obvious -- its limited sample set.

Flaw 1 : Not Enough Cities Included

The Case-Shiller Index tracks 20 U.S. metropolitan markets and brands itself a national index. Yet, according to Wikipedia, the U.S. is home to more than 3,100 individual municipalities.

This means that the Case-Shiller Index tracks fewer than one percent of all U.S. cities. Furthermore, its 20 tracked cities tracked aren't the nation's 20 most populous.

Four of the 10 most populous U.S. Cities -- Houston, Texas; Philadelphia, Pennsylvania; San Antonio, Texas; and  San Jose, California -- are notably absent from the Case-Shiller Index 20-City Composite. By contrast, smaller cities such as Minneapolis, Minnesota (#48) and Tampa, Florida (#55) are not excluded.

The "national" Case-Shiller Index is not very national at all.

Even on a city-by-city basis, the Case-Shiller Index gets it wrong. This is because the index lumps disparate city neighborhoods into a single, city-wide reading. 

In Chicago, for example, where home values increased 11.3% over the past 12 months, some neighborhoods out-gained others. Values in Lincoln Park and Lakeview are different from values in Wicker Park and Bucktown, as examples. Yet, to the Case-Shiller Index, Paulina, Melvina, and Lunt Avenue are treated equally. 

Flaw 2 : Too Few "Home-Types" Included

A second Case-Shiller Index flaw is its methodology.

The index considers only "repeat sales" of the same home in its findings, and those homes are required to be single-family, detached properties. This means that condominiums, multi-family homes, and new construction are not included.

In some cities, these "excluded" property types account for a large percentage of total monthly sales. New York City meets this criteria with its heavy concentration of condos and co-ops, as does Chicago, Boston, and, to a lesser extent, Los Angeles whose footprint extends into Orange County.

In Boston, condos increased in value by 9.2% as compared to 8.5% for the single-family homes. In Chicago, condos grew 14.9 percent.

With its limited property type set, Case-Shiller captures only a portion of the overall housing market.

Want to get today's condo mortgage rates? Click here.

Flaw 3 : Data Too Aged To Be Accurate

A third Case-Shiller Index flaw is the "age" of its data.

Because Standard & Poor's publishes on a 60-day delay, the Case-Shiller Index is reporting on a housing market that no longer exists. But, the data is even older than that.

Home sales tracked by the February Case-Shiller Index are sales which closed in February. Meanwhile, February closings are based on contracts written in November, December and January. This means that the Case-Shiller Index is only now reporting upon sales "made" last fall and winter -- half a year ago!

Last year, the housing market was different. Mortgage rates were different, consumer sentiment was different, and even Federal Reserve policy was different.

The time-lag of the Case-Shiller Index doesn't matter much to economists and policy-makers; persons occupied with long-term trends in housing. However, to individual buyers and sellers of real estate, the index is of little practical, everyday use.

How Much Home Can You Afford?

For this year's buyers of homes, the Case-Shiller Index will never be your "real-time" real estate indicator. However, it can do a good job of highlighting broader valuation trends in housing.

Thankfully, mortgage rates are low. Since the start of 2014, rates are down approximately 0.375 percentage points and purchasing power is up.

Get today's live rates and see for how much home you can be approved. Rates are available online with no cost, with no obligation to proceed, and with no social security number required to get started.

Click here to get rates.

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

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