The case against Case-Shiller

by Michael Dey, Executive Vice President, Home Builders Association of Greenville

While the FHFA House Price Index was reported up .3 percent in February, the Case-Shiller Index, which measures just the top 10 and top 20 housing markets in the country, was down.  According to Forbes, the Case-Shiller Index fell .8 percent from January to February.

The difference between the two indexes is considerable.  The FHFA House Price Index is a measure of all housing markets in the country based on mortgage activity backed by Fannie Mae and Freddie Mac.  The Case-Shiller Index measures just the top 10 and top 20 housing markets in the country.  Case-Shiller tracks repeat home sales over time.  FHFA is indexed to the contract mortgage amounts.

And therein lies the problem with the Case-Shiller Index; it measures just the largest housing markets, which is not a reflection of the whole country.  Most markets in the country don't come anywhere close to the 50,000 housing starts each year that were commonplace in markets like Atlanta.  And most housing markets did not experience the massive over building that occurred in many of the top housing markets, primarily because the smaller markets did not have the capacity to build on the scale that is possible in the largest markets.

Even more interesting is the fact that Robert Shiller, one of the founders of the Case-Shiller Index, was quoted by Reuters this week that the housing market will remain weak for a generation because suburban areas have lost their appeal to "walkable cities," the result of high gas prices.  Gas prices may be a factor if you live 30 miles from work in suburban Atlanta, but compact markets like Greenville will not be impacted by gas prices in the same way that a sprawling top 20 market is impacted.

Also consider that many of the top housing markets are in states that have been shedding population and jobs since long before the recession.  Much of that population and jobs have relocated to smaller markets in Southern and coastal states.

The continued reliance on data from the top 10 or 20 markets in the country as a barometer for the whole housing market provides a false sense of what is happening in the rest of the country.  For example, in Greenville building activity is up 60 percent in the last year.  And bear this in mind: just like the Case-Shiller Index provides an incomplete measure of housing today, it also provided an incomplete measure of housing seven years ago when those top 20 markets were red hot.  Could reliance on incomplete data have contributed to the overheated housing market of the recent past.  Is incomplete data contributing to the current overbearing regulation of housing activity today, particularly in smaller prospering markets like Greenville?

Federal regulators, banks, Congress, the White House, and the media would be better served to evaluate housing market-by-market, rather than rely on an index that is limited to just 20 out of the 270 markets in the nation.  Even though Case-Shiller says it measures 75 percent of the housing activity in the country, it still only measures 7 percent of the individual housing markets.