A recent post by Lance Lambert (ResiClub) prompted me to analyze how a reader should interpret a (hypothetical) headline that five different analysts each say that home prices will rise 4%. Who's the most bullish? On the surface they all have the same forecasts until you see that each one has (correctly) qualified their answer by referencing a different home price index. ( If no reference index, how will we measure the results vs their forecast?!?)
That rhetorical exercise led me to a deep dive on some of the publicly available home price indices, and how their performances have differed. (Note that I use "public" as some forecasters reference indices -often their own firm's - where historical data is not freely available).
Here's my results (with one way of answering the question below).
I took the historical national home price index from six vendors (with seven indices as I analyzed two Case Shiller indices). I ran, and mapped (see graph) the quarter/quarter change in the index since Q1 2012. (I started there as a) AEI only goes back that far, b) Fannie Mae only has quarterly data, and c) it was a period of generally rising home prices, so a comparable environment to measure the "4% gains" described above. In addition, I ran the correlations across the index returns.
(Note that as a first qualifier to the results, I'm going to revisit the date each index "looks up" (as some reference the first of a month, some month-end, and some quarter-end) to try and have each data series cover similar windows. For example, The Case Shiller index for activity through 11/30/2023 is mapped to the 2023 M11 data from Freddie Mac, the Nov 1, 2023 data from AEI, and the 11/30/23 data from Zillow. I note that some indices come out faster than others, but this analysis runs through the above data points (e.g. 11/30/2023 Case Shiller) as that is the latest data across all vendors). Changes to the "look up" dates might have small impacts on correlations.
Not surprisingly, since all indices measure changes in national home prices the correlations are relatively high, however there are difference based on the reference pools and methodologies.
AEI, Freddie, and Fannie Mae appear to be highly correlated, as each uses a combination of repeat sales and appraisals. In addition, AEI and Freddie both have monthly series (unlike Fannie Mae which is quarterly) so they are likely drawing from similar observations (although AEI includes non-conforming balance loans on higher-priced homes which have over-/under-performed conforming balance loans at various times.) (FYI - I have tended to reference Freddie Mac indices in OTC offerings as the data goes far back and >400 metros are covered. I'm game to reference AEI. I can't use Zillow -despite them being unique on this list of offering indices at the neighborhood level, as their policies do not allow third parties to reference their indices.)
The Case Shiller National index also (to my surprise) mapped closely against AEI and Freddie even though: a) the index is calculated with a moving average, and b) relies on a much smaller data set as it only tallies repeat sales. The impact of measuring using a moving average vs the possibly greater noise from a smaller sample set does not translate into higher volatility in Case Shiller National index (see table) as one index feature seems to offset the other.
Zillow, which uses an hedonic approach to index calculation, has a somewhat lower correlation with AEI (even though both include non-conforming loans).
FHFA is the outlier with the least volatile index results (due to smoothing impact of measuring home prices over a quarter?!?) and is the least correlated across the indices reviewed.
Of critical importance to my work, the Case Shiller 10-city index (the reference index for CME Case Shiller home price index futures) is not highly correlated with Freddie (possibly due to the CS 10-city index bias toward larger cities). This suggests that the CME might consider changing the benchmark contract to the Case Shiller National Index (more on that later).
Net, the monthly indices that rely on combination of repeat-sales and appraisals, and the Case Shiller National index where the moving average seems to offset the longer measurement periods are nearly interchangeable.
Now to the trick question posed in the premise, I might argue that the researcher basing their home price call on the FHFA index was the most bullish as that index has had the lowest cumulative gain since 2012. By contrast, the analysts touting AEI and Freddie Mac (which had nearly the same returns as each other) would be the least bullish, as those indices had (and might continue to have?!?) have more upside bias. For example, I'd take the bet that Freddie/AEI will outperform FHFA in 2024.
Anyway, a fun exercise that prompted a lot of thinking.
Please feel fee to contact me with any questions, or if you have any hedging ideas that you'd like to explore.
Thanks, John