"Home Prices: Many Measures, One Story"
by Frank Nothaft, Calvin Schnure, Amy Crews Cutts
July 9, 2007

One of the most carefully watched economic trends these days is the direction of housing prices. The housing market cooled abruptly after several years of white-hot performance, and slowing sales and elevated inventories threaten to undermine property values and perhaps other sectors of the economy as well. In light of this broad potential impact, some analysts note that different indicators appear to paint an inconsistent picture of price trends. Each of these measures has its own advantages and disadvantages, though, and a deeper look into the numbers reveals a clear message: home price appreciation has weakened sharply, but with significant differences across regions and metro markets.

Some reports give a more timely gauge of near-term price trends. The first news on housing prices comes from the sales prices of new and existing homes, published a few weeks after the end of each month by the Census Bureau and the National Association of Realtors, respectively. The median sales price for a new home fell 0.9 percent in May from a year earlier, while the median price of an existing home was down 2.1 percent. A drawback to each of these reports, however, is that they are highly vulnerable to a shift in the mix of homes sold. In some months, for example, reported prices may rise or fall not because the values of any specific homes changed, but rather because there were a greater number of homes sold in higher-priced or lower-priced markets.

Other reports overcome this problem by focusing on repeated sales transactions for the same property, thus yielding a more apples-to-apples price comparison. Some include refinancing transactions, and thus may be slow to capture turning points, as appraisal prices tend to lag the market. Freddie Mac’s purchase-only Conventional Mortgage Home Price Index (CMHPI) matches home-purchase transactions on the same properties over time using data from loans funded by either Freddie Mac or Fannie Mae; the Office of Federal Housing Enterprise Oversight (OFHEO) publishes a similar index based on the same underlying transactions. In contrast to the new and existing home sales measures, these repeat-sales indexes show prices in the first quarter up slightly from a year earlier, with the CMHPI posting a gain of 2.8 percent. While avoiding problems from shifts in the mix of home sales, these indexes exclude properties financed with mortgages above the loan-purchase limit for Freddie Mac and Fannie Mae, and like all measures based on prices of existing homes, do not capture changes in the value of new construction or the effect of additions and renovations.

The S&P/Case-Shiller® U.S. National Home Price Index is a repeat-sales index that expands coverage to homes purchased with jumbo loans, government-insured loans, or homes purchased without any mortgage financing. Its geographic coverage is a bit more limited, however, with a few states excluded due to lack of sales price data. In contrast to the CMHPI, this measure reported a 1.4 percent decline in national housing prices in the first quarter from a year earlier. The difference between the Case-Shiller index and the CMHPI may reflect, in part, trends in top-end housing markets that diverge from those financed with conventional conforming loans, as well as a heavier weighting of higher-priced regions in the Case-Shiller measure.