The Case Shiller home sales price indexes (CSI) overweight the sales of old houses and bank REO sales. The CSI indexes do not count sales of newer homes in good condition. As a result of that methodology, the CSIs seemed to do a good job showing when metro housing markets were beginning to roll over at the Great Housing Bubble top. Lower quality properties and increasing distress sales would obviously lead the market way down.
However, because Case Shiller indexes overweight older properties and distress sales, they missed the beginnings of the price bottom in 2010-12, and they typically lag the current housing market inflation on the way up.
In many US metros, median home prices are now well above the 2006-07 peak bubble levels. Newer, better quality homes perk up in price first and they inflate the most. As markets get frothier on the way up, the sales of better properties become an ever greater weight in the market. If you ignore them, then the fact that a market is in a bubble will be invisible. That’s what Case Shiller does. It ignores the hottest parts of the metro markets, either minimizing the magnitude of the bubble, or hiding it altogether.
This post was published at Wall Street Examiner on September 2, 2016.