By Danielle Hale
Brought to you by the Power Broker Network Report and the National Association of Realtors
All Real Estate is Local
All real estate is local – really local. This fact makes understanding the changes in house prices at a broad level difficult – really difficult. This can be problematic for policy makers and market participants like buyers, sellers, real estate agents and brokers who do not understand what the various measures of house prices are actually measuring and how they can be most helpful. To tackle that challenge, we will review the many series that are out there tracking house prices and discuss the major differences between them.
The Players
The major players in the house price tracking business are the National Association of REALTORS® (NAR) Median Sales Price, the Case-Shiller Index group, and two Conventional Mortgage Home Price Indexes – one by the Office of Federal Housing Enterprise Oversight (OFHEO) and one by Freddie Mac. Of these, the Case-Shiller Index is the most often cited and discussed on the Internet. A quick Google search pulled up more than 100,000 hits on the web for it verses much smaller numbers – under 10,000 hits – for the three other series combined.
National Association of REALTORS® Median Sales Price
Of the series listed above, only NAR’s is a pure median measure. Each month, NAR samples multiple listing services (MLSs) for information on closed housing transactions. This information is compiled into a median house price for the nation and for the census regions. Each quarter, NAR also gathers this information together for approximately 150 metropolitan statistical areas (MSAs). NAR’s series is the only one of the group above to include information on condos and co-ops – separately and combined – at all levels of measurement. NAR’s median home price is expressed as a dollar figure, making it a very convenient and easily understood figure. NAR’s use of MLSs results in broad geographic coverage, though this reliance also means that the sample is limited to transactions involving a REALTOR®. Since according to NAR’s Survey of Home Buyers and Sellers only 12% of transactions were For Sale By Owner (FSBO) and 85% of home sellers used an agent or broker in 2007, this omission is not of great concern.
The Others: Indexes and Weighted Repeat Sales
Each of the other major players is an index. Like all indexes, these indexes track house prices with a level of abstraction. Percent changes in the index figure mirror percent changes in the prices of houses; therefore, a single index figure is not very meaningful. The weighted repeat sales technique – employed by all of the other major players – attempts to address an issue arising in pure sales medians, namely, that the houses that sell one month, are not the same houses that sell the following month. If these houses differ in quality, then a change in the median sales price of houses reflects the change in the quality of the homes sold, as well as any appreciation in value that would have accrued to a constant-quality house. Researchers track and measure repeat sales to get past this. For example, if a house sold in 1980 for $100,000, and it sold again in 2007 for $400,000, it would register as a repeat sale. Researchers would use its 300% appreciation over 27 years with information from other repeat sales to determine how much this same (and therefore “constant quality”) home had appreciated in the most recent time period.
OFHEO and Freddie Mac
Repeat-sales methodology is very involved and requires an extremely large database of home transactions. OFHEO and Freddie Mac base their indexes on sales or refinances of homes with GSE purchased mortgages. The GSEs have a very large database with broad geographic coverage, and their indexes are valuable measures for tracking appreciation of homes with conventional, conforming mortgages (those that are eligible for GSE purchase.) However, because their database is limited to conventional, conforming mortgages, many types of homes are omitted from consideration in the indexes, including attached and multi-unit properties, properties financed by government insured loans (FHA or VA), and properties financed by mortgages exceeding the conforming loan limits.
Case-Shiller
In contrast to the broad based geographic coverage of OFHEO and Freddie Mac’s measures, Case-Shiller’s monthly metro area indexes cover only 20 metro areas. This is likely because Case-Shiller’s information on transactions comes from government recorders. Though costly to gather, this information does not exclude unconventional or non-conforming mortgaged homes. From these 20 areas, 10 and 20-area composites are created. These composites are often cited as national benchmarks despite their limited area coverage. Case-Shiller publishes a broader national index, but only quarterly. OFHEO, in recent attempts to identify the sources of differences between its indexes and Case-Shiller’s, determined that differences in the indexes stemmed from differences in coverage of properties , (GSE and non-GSE mortgage properties), but was unable to resolve how geographic coverage discrepancies at the national level might play a role due to limited information on the Case-Shiller methodology. The OFHEO study of recent differences noted that, “price declines seem to be particularly large for low and moderately priced homes without Enterprise-purchased mortgages.” Many of these low and moderately priced homes without Enterprise-purchased mortgages (that are omitted from OFHEO and Freddie Mac’s Indexes but included in Case-Shiller’s) are likely financed by subprime or other risky loan types which seem to be associated with greater volatility in home price-larger upswings and downswings.
Why Should You Care?
Pricing a home is not easy. According to the 2007 NAR Survey of Home Buyers and Sellers, 74% of sellers were assisted by agents in determining the asking prices for their homes and 80% of sellers received assistance on the review of offers. Each of the measures discussed here provides a different perspective on the real estate market in broad terms. Successful real estate brokers and agents will know how to use these and other tools to help clients appropriately price and sell homes.
Danielle Hale is a Research Economist for the National Association of REALTORS®. For more information, please visit www.realtor.org.
