Profiting From Real Estate Investments An Investor Newsletter From HomeVestors Of America, Inc. By Marcie Geffner / Vol. 3 No. 7 07/30/2008 How To Make Sense of House-Price Indices House price indices have taken economists, analysts and real estate investors on a wild ride this year. These widely reported statistics, which measure increases or decreases in home values over time, have been considered a reliable way to track housing market trends. But lately, these house-price figures have attracted renewed attention and their accuracy as market indicators has been called into question. Part of the problem is that house price indices utilize different data sources, property types, geographical areas and statistical methodologies to produce their results. The S&P Case-Shiller House Price Indices are based on weighted repeat-sales of single-family houses in 20 metropolitan statistical areas (MSAs). The Office of Federal Housing Enterprise Oversight (OFHEO) house price indices are based on weighted repeat sales and appraisal data from mortgages that are owned or securitized by Fannie Mae and Freddie Mac. And the National Association of Realtors median home prices (which aren't, strictly speaking, indices) are based on surveys of Multiple Listing Systems (MLSs). With those differences in mind, here are some points to consider: Location. National, regional and statewide house-price trends may be all but meaningless in local markets, and some MSAs may be equally inapplicable if they include multiple large counties and cities. Market data gleaned from an intimate knowledge of a specific neighborhood may be more useful for investors. Property type. Some house-price measures focus exclusively on single-family detached houses. Others are specific to condominiums, and still others throw multiple property types into one mix. The types of homes that are included or excluded from the analysis can affect the results. Special situations. Adverse events, such as the closure of a major employer or failure of a large housing development, can have a big impact on a local housing market, yet may not be reflected in house-price measures. Some adverse events create good opportunities for investors; others signal long-term misery in a specific locality regardless of broader market trends. Timeliness. House-price measures are computed and reported on different time schedules. Some are monthly; others are quarterly. The most current data isn't always the most useful, especially since some figures are revised weeks later. Be wary of out-dated data in fast-changing markets. Fine print. Statistical models are naturally subject to limitations and margins of error. For instance, median home prices can be affected by seasonality in home sales and the mixture of more or less expensive homes that were sold during the reported period. Historical data. House price indices aren't forward-looking and aren't meant to be used to extrapolate trend lines into the future. Forecasts should take into account current supply and demand factors such as new construction and job creation, respectively. The bottom line for investors is that house-price measures can be useful, but shouldn't be the be-all or end-all of market research. Copyright 2008, HomeVestors of America, Inc. All rights reserved. No part of this article may be used or reproduced in any manner whatsoever without written permission of the author. COMING NEXT ISSUE: Out-of-state investing. The Investor e-Newsletter is provided free by HomeVestors of America, Inc. Listen to the HomeVestors Real Estate Investors Hour each Sunday at 8 a.m. on WBAP Radio, click here to listen. HomeVestors of America HomeVestors®, the "We Buy Ugly Houses®" company, is now in 35 states and has more than 270 franchise offices. Learn more about owning a HomeVestors franchise by registering for our Webinar, held each Tuesday at 4 pm CST. Register at www.homevestors.com, then click on the Buy A Franchise icon, then click on the Webinar/Seminar tab. If you have a question, comment, or an idea for our newsletter, please click here. <back | printable version