Why You Can Ignore The Case-Schiller Home Price Index

by Alex Stenback on September 27, 2011

Standard and Poor’s Case-Schiller Home Price Index for July  is making headlines today, as it does every month. 

Cutting to the Chase, locally, the results the Twin Cities were:

- Prices rose slightly from June to July this year.
- Year over year, the index showed about a 10% decline in prices.
- Were are back at 2001 price levels, roughly 34% off ‘peak’ value, which  occurred Sept 2006.

The thing is, Case-Schiller, while interesting from a clinical standpoint, (and with arguably the best methodology of the widely followed indexes,) is just not all that useful for those of us that own, or seek to own, real estate. 

Mostly, it serves as good fodder for economists and media types who whose editors think “the horserace” needs coverage.

So here’s your three step program to put the Case-Schiller index into perspective:

1.  It is a lagging indicator: The report for “July” is actually a three month average of May, June, and July.  And if you think about the life cycle of the typical real estate transaction, 30 to 60 days elapse between when a home is purchased (buyer and seller sign a contract) and closing, when the sales data is reported.  This means the “July” index contains sales that were negotiated in February and March.  That’s 6 months ago in some cases folks.

Not exactly talking real-time here, are we?

2. It has spotty coverage: Nationally, Case-Schiller only covers 20 cities, and leaves 13 states out of the mix entirely. 

3.  It’s measure is too broad:  The most important thing to understand is there’s no such thing as the “Twin Cities” real estate market.  There are, literally, hundreds of unique submarkets – indexes that track metro wide prices lump the best performing locales in with the worst to derive an average.  Individual home buyers and sellers will experience different market conditions, and some areas in the Twin Cities are already seeing prices rise.

Bottom line:  Basing buying or selling decisions on months old, flawed data that may not apply at all in your specific area is foolhardy.

To draw a medical analogy, it helps to think of Case-Schiller as autopsy, rather than diagnosis.

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{ 1 comment… read it below or add one }

BetterAnalogy October 1, 2011 at 2:18 pm

More like getting the results of a blood test 3 months afterwards rather than an autopsy.

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