Home Price Index from April 2007 peak

The private-sector Case-Shiller Index reported home values up 5 percent nationwide in June. The government’s own Home Price Index, however, reached a different conclusion.

According to the Federal Home Finance Agency, month-to-month home values fell 0.3 percent in June, and values are down by 1.7 percent from June 2009.

So, as a home buyer and/or homeowner in San Jose , by which valuation model should you make your bets?  Perhaps neither. 

This is because both the Case-Shiller Index and the Home Price have inherent methodology flaws, the most glaring of which is their respective sample sets. 

The Case-Shiller sample set, for example, comes from just 20 cities across the country — and they’re not even the 20 most populated cities. Together, the Case-Shiller cities represent just 9 percent of the overall U.S. population

That’s hardly representative of the housing stock overall.

By comparison, the Home Price Index tracks home sales everywhere — every city in every state — but it specifically excludes certain properties.  The Home Price Index does not track sales of homes for which the financing comes from agencies other than Fannie Mae or Freddie Mac. This means that as FHA loans grow in popularity, the pool of Home Price Index-eligible homes is reducing. 

The HPI ignores homes backed by “jumbo” loans, too.

Therefore, the “right” model for home values cannot come from national data at all — it can only come locally. Neither Case-Shiller nor the government has the tools to get as granular as a neighborhood like Willow Glen. A real estate agent in the area does, however.

The best way to get a pulse for what’s happening in markets right now is to talk to somebody with good data.

Monthly change in Home Price Index from April 2007 peak

Last week, the Case-Shiller Index reported home values up 0.8 percent across 20 tracked markets. The public-sector Federal Housing Finance Agency has reached a similar conclusion.

Reporting on a two-month lag, the government’s Home Price Index shows home values up 0.8 percent in April, buoyed by the expiring federal home buyer tax credit and low mortgage rates.  It’s a positive signal for a recovering housing market — in San Jose and everywhere else.

But just because the Home Price Index says home values are rising, that doesn’t mean they are. The Home Price Index methodology is flawed on multiple fronts.

First, the Home Price Index reports on a 60-day delay. This two-month lag turns the HPI a trailing indicator for the housing market instead of a forward-looking one. If you’re a home buyer looking for direction, HPI won’t give it to you — you’ll have to get that analysis from your real estate agent.

Second, HPI only accounts for home values in which the home’s attached mortgage is backed by Fannie Mae or Freddie Mac.  As the FHA market share grows, fewer homes get included in the HPI sample set, and HPI values may be skewed high or low.

And, third, HPI doesn’t account for new home sales — only repeat ones.  This, too, eliminates a major segment of the market.

All of that said, though, the Home Price Index remains important to housing.  It’s still the most comprehensive home valuation model in print and it’s been giving strong readings since the start of year.  You can’t ignore that on any level.

It’s July and you may have missed the “rock bottom” Blossom Hill home prices from earlier in the year, but homes are still relatively inexpensive. Couple that with all-time low mortgage rates and home affordability looks excellent. Consider making an offer while the terms are right.