The Case-Shiller Index : Flawed, Unreliable, And Soaring In November
Standard & Poor's Case-Shiller Index reports that home values rose between October and November of last year, and between November 2011 to November 2012. In some cities, values rose by a lot.
The November 2012 Case-Shiller Index shows what today's home buyers have already learned the hard way -- that purchasing power has dropped as the housing market has recovered.
Case-Shiller Index : Phoenix, Detroit Lead Recovery
Standard & Poor's recently released its November 2012 Case-Shiller Index. The index tracks home price changes from month-to-month, and year-to-year, in select cities nationwide including San Diego, California; Los Angeles, California; and Las Vegas, Nevada.
As compared to October 2012, home values rose in 10 of the 20 Case-Shiller Index-tracked markets, led by a 1.4% gain in San Francisco, California and in Phoenix, Arizona. Minneapolis, Minnesota also showed strong growth, rising 1.0 percent between October and November.
On an annual basis, the Case-Shiller Index showed broader U.S. gains. Nineteen of the 20 tracked markets improved in the twelve months ending November 2012. Phoenix and San Francisco led all cities with annual gains of 22.8% and 12.7%, respectively. Detroit, Michigan ranked third with annual home value gains of 11.9%.
Only New York City, New York posted an annual loss. The area -- comprised of Manhattan, Brooklyn, Queens, Staten Island, and Yonkers -- lost 1.2% in value between November 2011 and November 2012.
Regardless of what city in which you're buying, however, show restraint about the Case-Shiller data -- it should not be used to make buy or sell decisions with a home. The Case-Shiller Index is a flawed metric and may push you to improper conclusion.
The Case-Shiller Index's first flaw is its most obvious -- its limited sample set.
Flaw 1 : Not Enough Cities Included
According to Wikipedia, there are more than 3,100 municipalities nationwide. Yet, the Case-Shiller Index includes data from just 20 of them -- and they’re not the 20 largest cities, either.
Four of the 10 Most Populous U.S. Cities -- Houston, Texas; Philadelphia, Pennsylvania; San Antonio, Texas; and San Jose, California -- are specifically excluded from the Case-Shiller Index sample set whereas smaller cities such as Minneapolis, Minnesota (#48) and Tampa, Florida (#55) are not.
The 20 Case-Shiller cities account for fewer than 1 percent of all U.S. cities which renders the "national figures" of the Case-Shiller Index not very national at all.
Even on a city-by-city basis, the Case-Shiller Index gets it wrong. By lumping disparate neighborhoods into a single, city-wide result, the index ignores the relative strength of one area at the expense of another.
In Chicago, for example, in which home values increased 0.8% over the past 12 months, there were some neighborhoods which performed better than average, and other which underperformed. Residents of Lincoln Park and Lakeview no doubt saw different appreciation/depreciation levels as compared to residents of Wicker Park and Bucktown.
Such is the nature of real estate.
Flaw 2 : Too Few "Home-Types" Included
A second Case-Shiller Index flaw is its methodology for measuring changes in home value.
The index considers only "repeat sales" of the same home in its findings, and those homes must be single-family, detached property. Condominiums, multi-family homes, and new construction are not included.
In some cities, "excluded" property types can 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.
With its limited property type set, Case-Shiller captures just a portion of the overall housing market.
Flaw 3 : Too Aged To Be Accurate
And, third, the Case-Shiller Index is flawed by "age".
Because Standard & Poor's publishes on a 60-day delay, the Case-Shiller Index is reporting on a housing market that no longer exists. And, it's not a 60-day delay, even -- it's more like 6 months.
This is because home sales that closed in November are actually based on purchase contracts for homes written between August-October -- half a year ago! -- and it's these contracts upon which the Case-Shiller Index is based.
Historical data helps economists and policy-makers understand the long-term trends of U.S. housing, but it does little good for today's buyers and sellers in need of accurate, real-time data. For that, you need something current.
How Much Home Can You Afford?
If you plan to buy a home in 2013 or 2014, the Case-Shiller Index highlights the broader trend toward rising home prices nationwide, even as it overlooks the market as it exists "right now".
Buyers can use the Case-Shiller as supplemental research, but the best data will come from a real estate professional who's deep in business every business day.
Now, it's time to find out how much home you can afford. Get started with today's mortgage rates and plug them into your budget. It's fast and free, and there's no social security number required.