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3 Flaws In The Case-Shiller Index; Report Shows Values Rising

Posted December 1, 2014

3 Flaws In The Case-Shiller Index; Report Shows Values Rising

Case-Shiller Index shows home values rising in all 20 tracked cities, annually

Today's Mortgage Rates Under 4%

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

Homes are more expensive as compared to last year, as home equity builds in nearly all U.S. markets.

This year's upward shift in housing has helped existing U.S. homeowners to refinance down to current mortgage rates, but the rise in home values has done little to help today's buyers. 

Large downpayment or no downpayment, homes are more expensive than they were one year ago. Thankfully, mortgage rates have remained cheap.

According to Freddie Mac, 30-year fixed rate mortgage interest average are averaging below 4% for the fifth time in seven weeks. It's an inexpensive time to finance a home. 

Click to get today's live mortgage rates.

Case-Shiller Index : Miami, Charlotte Post Biggest Monthly Gains 

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

As compared to August, home values rose in 11 of the 20 tracked markets in September, led by a 0.6 percent gain in both Miami, Florida; and Charlotte, North Carolina. 

Las Vegas was the next biggest gainer, adding 0.5 percent month-over-month. 

Washington, D.C. led the monthly losers. Homes lost 0.4% of their value, on average, across the nation's capital, which area which includes Montgomery County, Maryland; and, Loudoun County, Virginia.

Meanwhile, on an annual basis, all of the Case-Shiller Index's 20 tracked markets are winners, led by Miami and Las Vegas. Home values have gained 10.3% and 9.1%, respectively, since September of last year.

The "weakest" of the Case-Shiller Index cities is Cleveland, Ohio. Home values are up just 0.8% over the last 12 months.

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

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, in other words, 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 4.0% 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 4.9% as compared to 4.5% for the single-family homes. In Chicago, condos grew 2.3 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 July Case-Shiller Index are those which closed in September. However, September closings are based on contracts written in June, July, and August. This means that the Case-Shiller Index is only now reporting upon sales "made" at the start of summer -- a half a year ago!

At the beginning of the summer, the U.S. housing market was different from how it is today. Mortgage rates were different, consumer sentiment was different, and even Federal Reserve policy was different.

The Case-Shiller Index's time lag may not matter much to economists and policy-makers; persons whom are occupied with long-term trends in housing. But, to individual buyers and sellers of real estate, the time lag makes the index almost useless for everyday use.

Get Current Mortgage Rates Now

For home buyers, the Case-Shiller Index will never be your "real-time" real estate indicator. However, does a good job of highlighting broader valuation trends in housing. And, going on three years now, home values are rising.

The good news is that mortgage rates remain low. Get a live rate quote today. 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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