Which home price index is right?

Three home price indexes were released this week reporting year-over-year price declines ranging from 8.1 percent to 18.7 percent. Which one is right? The S&P/Case-Shiller index for 20 large cities reported an 18.7 percent price decline. The Federal Housing Finance Administration (FHFA), which oversees Freddie Mac and Fannie Mae, reported an 8.1 percent decline. Both of these are repeat sales indexes. The National Association of Realtors (NAR) reported a 15.4 percent decline which is the average of all sales activity reported by multiple listing services
The FHFA index is the most accurate measure of the national housing market because it is comprehensive, relying on the huge database of mortgages owned or guaranteed by Freddie Mac and Fannie Mae. Reed Construction Data uses this index to assess trends in the national housing market.
But the FHFA index is not the best measure of any individual market; it includes only conforming mortgages. Jumbo loans more than $417,000 (the limit has since been raised) are excluded. Most subprime loans are also excluded because they were not originated with the intention of selling them to Freddie Mac or Fannie Mae. These exclusions are trivial in most markets but distort index trends in the most expensive markets and in the market where subprime loans were significant several years ago. This makes the FHFA index unreliable in much of the southeast, southwest and parts of the northeast. Homes with subprime or jumbo loans are far more likely to be financially troubled and sold very cheaply in foreclosure or distress situations. As a result the FHFA price index underestimates price declines in troubled markets.
Where available, the Case-Shiller index is more accurate. But it is only available for 20 cities. This is too small a sample to be a reliable national index. Nonetheless, the general media reports it as if it were a reliable national index. The NAR index includes all mortgages but it has a serious mix problem. It averages all transactions in a time period to calculate an average and a median price for the period. This yields very volatile results. It is the only index available for smaller housing markets.
Taking the useful information from each index we conclude that the long national housing recession is winding down and will end in a few months. The FHFA index has been approximately steady so far this year. But recovery will be slow. Home prices are rising modestly already in many markets in both the NAR and Case-Shiller indices. But these are the smaller markets that are not large enough to dominate the national average. Similarly, home prices continue to fall rapidly in a small number of large markets in both the Case-Shiller and NAR indices without enough aggregate sales to dominate the national average.
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