Home prices are up. No, down. No, flat. Where's the truth?

Latest Case-Shiller index shows monthly gains, though prices are down 15.4 percent from last June. But such barometers are not a one-stop guide to the housing market.

Richard Clement/Reuters/File
A house for sale is listed as "contract pending" in Arlington, Virginia on July 28.
Rich Clabaugh/Staff

When you hear news about home prices rising or falling these days, it might be good to take the data with a grain or more of salt.

Here are the latest numbers to be released, for example: US home prices showed a 15.4 percent annual drop as of June, in the Standard & Poor's Case-Shiller index of 20 large cities, released Tuesday. The number suggests an improving real estate market, since the year-over-year price drop has been getting smaller for several months. Also, the index has risen on a month-over-month basis in both June and May.

The number is an important indicator, but analysts say neither this nor any other overall price barometer should be taken as a one-stop guide to the housing market.

For one thing, conditions in your neighborhood probably differ from national averages. For another, even as a US-wide rule of thumb, home-price indexes can be skewed by shifts in the types of homes sold – the recent mix is a bit different from the mix a year ago.

"All of the indexes suffer from what economists call the sample selection problem," says Patrick Newport, an economist at IHS Global Insight in Lexington, Mass. The indexes are based on transactions that occur, which aren't necessarily a representative mix of all existing homes.

The imperfections don't make the price indexes useless, he says. But the problem is worth noting at a time when some signals suggest that home prices may have stopped falling or begun to rise again.

Last week, when releasing its own home price index, First American CoreLogic highlighted one of the unusual factors at play in the data.

"The seasonal improvement in home prices in the first half of 2009 is a positive sign," the company said. "But it is important to note that a decline in distressed sales, rather than an increase in traditional home sales prices, was responsible for the uptick."

Another provider of housing data, RadarLogic, also says that a change in the mix of homes being sold is affecting its results. "The shift in the mix of sales toward the expensive zip codes has contributed to year-to-date price gains" in most metro areas, its report says.

Over the past year the numbers have prompted hot debate among experts, often focused around the popular Case-Shiller index. John Burns, a real estate consultant based in Irvine, Calif., is among critics who argue that the index probably exaggerated both home-price gains during the boom and the recession-related declines.

The big question is what's happening now, and next. Some analysts argue that home prices may have hit bottom, while others say prices in general could have another 5 or 10 percent to fall, due to a high for-sale inventory and high foreclosure rates. Mr. Burns, in a recent note to clients, predicted that the upturn in the US housing market may reach a "false peak" around November, to be followed by weakness in the first quarter of 2010.

Whatever forecast is right, home price indexes will be just one useful guide to what's going on. Others include the pace of home sales, the level of inventory on the market, foreclosures, local job-market conditions, and mortgage interest rates.

To see what the indexes are saying about prices in 20 big cities over the past year, have a look at the chart that accompanies this story. It compares data from Case-Shiller, the Federal Housing Finance Agency, First American CoreLogic, the National Association of Realtors, and RadarLogic.

For more detail on how the various home price indicators are created, here's a Texas A&M University report that sums up some of the key points in a few charts. (See "When Data Collide" in the July 2009 issue.)


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