Home price indexes don’t tell the full story
Home price indexes don’t tell the full story
Q: I’ve been concerned with the news that housing prices throughout the U.S. have been falling dramatically. How are housing prices determined? Is it based on sound research?
A: Dr. Anthony Downs of the Brookings Institute recently published a book titled “Real Estate and the Financial Crisis” in which he points out some interesting facts about reported housing prices over the past several years. There are three generally accepted home price indexes: Case-Shiller, Federal Housing Finance Agency (FHFA), and National Association of Realtors (NAR) Median Index. All three do a decent job, but all three commit a serious error.
None distinguishes between what is happening to the prices of foreclosed homes and what is happening to prices of homes whose sellers are not being foreclosed upon (or whose sellers are otherwise not experiencing financial difficulties). Research in Downs’ book shows that the difference in such states as California (i.e., high-foreclosure states) biases the outlook substantially.
Since their peak in June 2006, average prices in California dropped 16.1 percent for non-foreclosed homes, and 28.2 percent for “normal” homes as of May 2008. This gap has widened since June 2006 but before then the difference barely made a difference in housing prices generally.
The upshot is that housing prices have not really fallen as much as many say they have.
Charles Carter is an assistant professor of real estate in the Barry Kaye College of Business at Florida Atlantic University. His areas of expertise include mortgage-backed securities and appraisal methodology. This Q&A is distributed by McClatchy-Tribune Information Services.
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