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 Mention Case-Shiller next time you’re at a swanky cocktail party. A few people will know what you’re talking about and will immediately recognize you as one of the intellectually elite. Most people won’t know what you’re talking about but will pretend that they do so as not to draw unfavorable attention to themselves.
Karl Case and Robert Shiller are two relatively famous economists from Wellesley College and Yale University, respectively. In the 1980’s these two developed a methodology to measure housing price movements by using the “repeat sales pricing technique.” By doing so, they were able to take the complex transactions of house purchases within specific cities or across the entire country and boil them down into an index which can be graphed and analyzed (see chart). Like utilizing NASDAQ as an aggregate measure of the stock market, you can view the Case-Shiller index as a tool to understand the general trends of the housing market.
The Case-Shiller index is developed by comparing the current price that was paid for a house with the previous price paid, to model the change in house values for a given market. Every 3 months, they look at all of the homes that have sold in a specific region. They compare the current sales price with the homes previous sales price to calculate the net change in housing value. This method is used to create 23 indices; 20 metropolitan regional indices, two composite indices (one of 10 metro areas and one of all 20) and a national index. These are published by Standard and Poor’s.
Case-Shiller Market Regions and Metropolitan Areas
9 US Market Regions |
10 Metropolitan Area Indices |
10 Additional Metropolitan Areas |
New England |
Boston |
Atlanta |
Mid Atlantic |
Chicago |
Charlotte |
South Atlantic |
Denver |
Cleveland |
East North Central |
Las Vegas |
Dallas |
West North Central |
Los Angeles |
Detroit |
East South Central |
Miami |
Minneapolis |
West South Central |
New York |
Phoenix |
Mountain
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San Diego |
Portland OR |
Pacific |
San Francisco |
Seattle |
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Washington DC |
Tampa |
The goal of the index is to capture the fundamental change in value of a house. It is not attempting to capture changes in value that might be due to modifications to that house such as significant improvements (new kitchen, additional rooms, etc.) or disrepair (houses that have not been maintained, that might be in foreclosure, etc.) Thus the sales data is modified slightly (see Figure) to remove potentially misrepresentative transactions that are deemed to be outliers. As such, it’s important to understand what IS and IS NOT included within the data.
Case-Shiller IS |
Case-Shiller IS NOT |
Individual single-family homes |
Multi-family homes such as condos, co-ops, multi-family residences. Hence Case Schiller data for metropolitan areas signficantly underreports a large, important segment of the market. |
Weighted to account for substantial remodeling which may impact price or potential neglect (measure value given a constant level of quality) |
New construction – houses must have been sold twice before they can be included in this index |
Based on sales price of homes (delta from first to second sale). The listing price does not factor into the equation, only the actual sales price. |
Foreclosures – foreclosed property is assumed to be depressed property. |
Weighted based on the time interval between sales – this means that the larger the gap between the first and second time a house is sold, the less weight it is given in the index. This methodology attempts to account for the probability that the longer somebody owns a home, the more likely they are to have made significant physical changes. |
Non-arms length transactions – this means sales between relatives. These types of transactions might not reflect the market price for a house. |
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Transactions subsequent to substantial physical changes to the property. The index is trying to capture the value of a home, not the value of upgrades (additions, new kitchens, etc.). Any transactions where it appears that substantial upgrades have occurred are removed. |
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Transactions where the property type is changed, for example where a large home is converted into condos. |
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Transactions where a home sells more than once within a 6-month window as presumably, this could indicate an unusual circumstance such as an investor overhauling a depressed property or possibly fraud. |
Interpreting Case-Shiller Data
Although the Case-Shiller index is the most comprehensive measure of broad housing market trends available, some purists argue that it is open to interpretation due to the type of sales data that is used to create it. Some of those interpretations include:
- The index captures the sales price. This doesn’t include potential sales incentives like rebates, covering of closing costs, or plasma TVs and hottubs etc. which are used more frequently in a declining market. Thus the index may understate declines.
- The index includes 20 metropolitan markets and yet doesn’t include multi-family homes and condos, which can make up a significant portion (60%+) of the available housing in large cities. Condos typically appreciate more slowly than single-family homes. Thus the index may overstate the price appreciation in large cities.
- Conversely, strong sales of condos (again, not captured by this index) can have a dampening effect on the sales of single-family homes. Condos frequently appeal to a broader range of buyers as they can be used as rental property, second homes, appeal to first time home-buyers, etc. So the index could potentially overstate the declines in a market.
- Alternatively, condos have historically seen greater price depreciation in a weak housing market. By failing to capture these sales, the index could understate the declines.
- The index does not include foreclosure property, based on the assumption that it is often in a state of disrepair and thus not representative of the market. Historically this may have been true, however with the growing number of foreclosures due to the rash of subprime loans over the past 10 years, there are increasing numbers of well-maintained homes falling into foreclosure. Therefore the index may underestimate the downside of a market by failing to capture these transactions.
- New homes are not included as there is no “previous sales price” to compare them to. Thus, many high-end new developments are not included in the index, which could understate the upside in a market.
In general however, utilizing either the metropolitan or the national index to understand housing trends, Case-Shiller provides a powerful and insightful tool to understand the housing market. |
