You've probably heard the Case-Shiller Index mentioned repeatedly in the news. Maybe you know it has something to do with home prices and the housing market. But what is this index, exactly, and how does it affect you?

What Is the Case-Shiller Index?
The Case-Shiller Index was developed in the 1980s by three economists: Allan Weiss, Karl Case and Robert Shiller. The trio later formed a company to sell their research; that company was purchased by Fiserv, Inc., which tabulates the data behind the index. The data is then distributed by Standard & Poor's.

The index, formally known as the S&P/Case-Shiller home-price index, is actually not one index at all. There are really several indexes:

  • The national home price index, which covers nine major census divisions. It is calculated quarterly and published on the last Tuesday of February, May, August and November.
  • The 10-city composite index, which covers Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco and Washington, DC.
  • The 20-city composite index, which includes all of the above cities plus Atlanta, Charlotte, Cleveland, Dallas, Detroit, Minneapolis, Phoenix, Portland (Oregon), Seattle and Tampa.
  • Twenty individual metro area indexes for each of the cities listed above.

The indexes, aside from the national index, are published on the last Tuesday of each month at 9am EST. There is a two-month lag time in the data that is reported, so the report issued in May only covers home sales through March.

Each index measures changes in the prices of single-family, detached residences (also known as houses) using the repeat-sales method, which compares the sale prices of the same properties over time. New construction is excluded - since these houses have not been previously sold, there is no way to calculate how their sale prices have changed until they have had two owners (at which point they are no longer new construction). Condos and co-ops are not included in any of the major indexes; however, there is a separate condo index that tracks condo prices in five major markets: Boston, Chicago, New York, Los Angeles and San Francisco.

The types of sales tracked by the Case-Shiller indexes are called arms-length sale transactions. These are transactions where the home was sold at market value and the sale price data can be used to get an accurate snapshot of the housing market. A transaction where a mother sold her home to her son for a favorable, below-market price would not be included in any Case-Shiller index because it doesn't accurately reflect overall housing market activity. Foreclosure sales are included in the indexes because a sale between a bank and an individual is considered both arms-length and a repeat sale.

Also excluded from the index are properties whose designation changes (a property that was recently considered a house but is now a condo wouldn't be included), sales right before or after a property has been dramatically changed (like a two-bedroom house remodeled to a five-bedroom house) and transactions that appear to have data errors (a home once sold for $100,000 later reported as sold for $10,000, for example).

Why Home Prices Matter
Obviously, if you're looking to buy or sell a residential property, you'll be interested in whether home prices are going up or down and by how much. If you're selling and prices seem to be increasing, you might want to hold off selling while you wait and see if prices keep going up. If you're buying and you see prices going up, you might want to speed up your purchase decision while there are still deals to be had. Or if prices are declining, you might want to see if you can hold off on your purchase while prices continue to sink. Of course, no person or index can really predict what will happen to home prices.

Even if you're not buying or selling a home, home prices are an indicator of how the broader economy is performing. Do people feel confident that now is a good time to make a large, expensive investment? How well is a particular geographic region performing economically? How are businesses that have a large stake in the housing sector performing? The Case-Shiller Index provides insight into all of these questions.

It's even possible to take advantage of changes in home prices indirectly by investing in S&P/Case-Shiller Home Price Indexes (CSI) futures and options. This type of investment is recommended for businesses such as property and real estate developers, banks, mortgage lenders and home suppliers to help them mitigate the risk of their large stakes in the housing sector. Even businesses that have little or nothing to do with housing may want to invest in these products to diversify the investment risks they are exposed to.

Finally, many people have at least as much, if not more, invested in their homes as they do in stocks. Home price movements thus have a significant impact on the total value of their portfolios.

Alternate Housing Indexes
The Case-Shiller indexes, though perhaps the most well known, are not the only ones tracking home prices.

The U.S. Federal Housing Finance Agency (FHFA) publishes a quarterly housing price index that it has cleverly named the HPI (or Housing Price Index). It uses the Case-Shiller repeat-sales method for its calculations, but it covers 363 metropolitan areas and includes refinances, not just sales. According to the FHFA, this index only covers "single-family properties whose mortgages have been purchased or securitized by Fannie Mae or Freddie Mac since January Very large mortgages known as jumbo mortgages are not purchased or securitized by Fannie Mae or Freddie Mac, so these mortgages are not included in the index.

A company called First American CoreLogic produces the LoanPerformance Home Price Index. It also uses repeat-sales data, but is much more comprehensive. According to the company's website, their data covers "6,070 ZIP codes (58% of total U.S. population), 519 Core Based Statistical Areas (CBSA, 85% of total U.S. population) and 898 counties (81% of total U.S. population) located in all 50 states and the District of Columbia."

The IAS360 House Price Index is published monthly and covers price trends in four U.S. Census regions, nine U.S. Census divisions and 360 U.S. counties for single-family detached home sales. Though the IAS360 only includes arms-length transactions, it does not use the Case-Shiller method, saying that "it significantly limits the number of transactions available to define the trend which may be exacerbated in slower market conditions." Instead, the IAS360 uses proprietary technology, because it believes that its county-level data are more useful than data tracking "broad geographical areas." One key aspect of the index is that it is published with only a one month lag compared to the two month lag of the Case Shiller, making it a timelier indicator.

Foreign Housing Price Indexes
Furthermore, the United States is not the only country that produces housing price indexes. Here are a few examples of other countries that produce housing indexes:

  • Canada's major index is the National Composite House Price Index. It also uses the repeat-sales method, and it combines data from single-family home sales in Vancouver, Calgary, Toronto, Ottawa, Montreal and Halifax.
  • Ireland's permanent tsb House Price Index is produced by the Irish bank permanent tsb, which owns about 20% of the country's residential mortgage loans. This index takes a home's size, type, location and other characteristics into account using a complex technique known as multivariate linear regression analysis.

The Case-Shiller index is a widely used and respected barometer of the U.S. housing market and the broader economy. Now that you understand what it is and why it's important, the next time you're reading the newspaper or watching the news, you might pay a little more attention when you hear about the Case-Shiller Index.

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