The Case-Shiller is the authority on home prices in the U.S. housing market, but is its methodology riddled with flaws?
By Peter Ricci
The monthly release of Standard & Poor’s Case-Shiller Home Price Indices is always a red letter day for the housing market, an authoritative indicator on where the housing market is headed.
The reason for that importance is simple – after all, the Case-Shiller is far and away the most widely-cited measure of home prices in the U.S. housing market. But could we be taking the mighty index for granted? Are there obvious flaws to the index that compromise its important findings?
The Flaws of the Case-Shiller: 3 Considerations
That’s what Dan Green, a mortgage professional who runs The Mortgage Reports website, believes, and he boiled his issues down to a few easily digestible points. Here are the three most notable:
1. Too Few Cities Included – Though there are more than 3,000 municipalities nationwide, the Case-Shiller only collects data for 20 of them, a discrepancy that Green argues results in an incomplete portrait of the nation’s home prices. Also, the Case-Shiller ignores some of the nation’s largest cities; Houston, Philadelphia, San Antonio and San Jose are all excluded from the index.
2. Limited Housing Stock – This flaw, admittedly, is rather shocking – the Case-Shiller only factors in repeat sales of single-family, detached properties in its metrics. So all those lovely condos, two flats and new construction properties in our fine housing market? Not included, incredible as it may sound.
3. Delays Galore – The Case-Shiller reports on home prices on a two-month lag, but as Green points out, it’s more like a six-month lag, given the index’s reliance on contracts. Take November’s Case-Shiller – the closed contracts for that month likely reflect home sales from August to October, so though the Case-Shiller is utilizing those contracts to compute home prices for November, it could be using contracts (and prices) that are four to six months old!
So, is the Case-Shiller overrated? Do we worship at its altar while ignoring those glaring flaws? And should we demand that S&P shake up its methods and produce a more relevant, nuance index? Give us your thoughts in the comment section.