The Case-Shiller Index : Flawed, Unreliable, And Down In November

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Case-Shiller Index Nov 2011 :

Standard & Poor's Case-Shiller Index reports that home values fell between October and November of last year, and from November 2010 to November 2011. It pours water on the theory that housing is in recovery. Or does it?

The good news for folks betting on a housing recovery is that, as buyers and sellers in today's real estate market, we can safely ignore the Case-Shiller Index's findings.

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The Case-Shiller Index : Phoenix, Detroit Leading Recovery

Standard & Poor's released its November 2011 Case-Shiller Index this week. 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 2011, November home values fell in 19 of the 20 Case-Shiller Index-tracked markets, led by a 3.4% drop in the Chicago, Illinois region. Only Phoenix, Arizona showed an increase from October, rising 0.6%.

This was the second straight month in which Phoenix was the lone "improving" city.

Don't let the data get you down, though. You can't use the Case-Shiller Index findings when making your own buy or sell decisions. The Case-Shiller Index is a flawed metric and, as such, may lead you to improper housing market conclusions.

The Case-Shiller Index's first flaw is its most obvious -- its limited sample set.

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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. In other words, the "national figures" of the Case-Shiller Index aren't really national.

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 the aforementioned Chicago, there are areas that fared much better than November's -3.4% as cited by Case-Shiller.

Some areas fared much worse.

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 -- Chicago, for example -- "excluded" property types can account for a large percentage of total monthly sales. The same is true for New York City 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.

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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'snot 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.