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House Prices - A Tale of Two Indexes

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There are two indexes which reflect the change in house prices over time - the S&P/Case-Shiller Home Price Index (S&P/C-S) and the Office of Housing Enterprise Oversight House Price Index (OFHEO HPI). These two indexes provide different views of home price appreciation/depreciation over the past 7 years. I noticed a reference to this situation in the WSJ and the following discussion is the result of my research into these two indexes.

Case-Shiller uses a weighted-repeat sales methodology: by compiling data on home sales and matching transactions for the same house, sales pair are created, reflecting an increase or decrease in price. These in turn are aggregated into an index. The data is compiled by Fiserv, Inc. Considerable care is take to eliminate fraudulent or non-arms length transactions, and only actual purchase data is used - refinancing is ignored. Because a longer time interval between sales increases the chance that renovations, additions, or deterioration has changed the house, pairs that are closer together in time are given a larger weight.

OFHEO estimates and publishes quarterly house price indexes for single-family detached properties using data on conventional conforming mortgage transactions obtained from the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association ("Enterprise data"). In its original form it includes both purchase and refinancing data, while Case-Shiller is purchase only. Using this data set, a similar weighted-repeat sales methodology as described above is used to construct an index.

Both indexes come in a number of versions. For the purposes of my research, I compared the S&P/C-S Composite 20, which covers the 20 largest metropolitan areas, with OFHEO's U.S. all-transactions HPI, which includes purchases and refinance mortgages. Using a ratio to set them both at 100 as of 1/1/2000, I graphed them together quarterly, as follows, ending on 12/31/2007:

Since 2000, the S&P/C-S has taken a separate path, increasing more rapidly up to the middle of 2006 and then converging back toward the OFHEO over the past year. Probably they converged at the end of the first quarter 2008.

My question is - after the convergence, can S&P/C-S continue on down? Can it drag the OFHEO index down with it? It would be a lot easier to make the call if information were available as to exactly what transactions are shared between the two datasets. Also, the choice of 12/31/1999 is arbitrary, although changing that by a year or so would not make much difference in the comparison.

How to explain the difference in the two indexes? One possible explanation - the data consists of paired transactions, so if either leg was not a conventional conforming mortgage the pair will not be in the OFHEO index. I would guess that for the Enterprise transactions the price was fairly realistic. S&P/C-S may include sub-prime, Alt/A, Option ARMS etc. where transactions were at inflated prices. OFHEO makes an effort to reconcile the two indexes - I reviewed it and felt they did not fully succeed in explaining away the difference.

Whatever the causes may be, I think it's worth bearing in mind when you read these horrible headlines about how fast home prices are decreasing, that there numerous ways to manipulate and interpret the data available. As ilustrated by the graph above, different results are possible, and some are not as scary as others.

Tom