What Does The Case-Shiller Index Measure? And How Does It Translate For Investors?

Key Takeaways

• The Case-Shiller Index measures home price data and provides an overview of the health of the housing market.
• Knowing the health of housing is important as it makes up a large portion of the US economy.
• There are other tools that measure housing data, but none are as widely accepted.

The price of housing has a significant impact on the US economy. It only makes sense then to have a way to track housing prices over time. This is where the Case-Shiller Index comes into play. Economists can better forecast what lies ahead by having a record of what housing prices did as the economy expanded and contracted. But what is the Case-Shiller Index exactly, and how does it work?

What Is The Case-Shiller Index?

The Case-Shiller Index is the most popular tracking methodology for house prices in the United States. Created by economists Karl Case and Robert J. Shiller, it tracks the rise and fall of the price of single-family residential homes across the nine US census divisions. It’s calculated monthly and updated quarterly. What many people don’t realize is that the Case-Shiller Index is not a single index. There are four different indexes used to track home prices. The only one that tracks national prices is the Case-Shiller US National Home Price NSA Index, which you hear about most.

Here are the other indexes that also track home prices:

• The 10-City Composite Index tracks prices in ten of the major cities in the country.
• The 20-City Composite Index considers data from the ten cities in the previous index, plus ten more of the largest US cities.
• There is also an individual monthly index for each city included in the 20-city index.

How does it work?

At its heart, the Case-Shiller Index uses the repeat-sales method to calculate home prices. It entails tracking when someone purchases a property and when it is sold, and then looking at the difference between these two prices. The Case-Shiller Index does not include new-build properties. Properties are only included in the Case-Shiller Index when resold.

It’s important to know that not all resales are included. For example, the index will exclude sales between family members or home foreclosures. This is because these sales are not the most accurate reflection of typical home prices. It also excludes homes sold more than once in a six-month period. It only tracks arms-length transactions, meaning each party to the sale is in it for the best deal for themselves.

When a sale of a property is made, it is recorded. The team that produces the Case-Shiller Index will then track down when that property was last purchased. This produces a pair of figures. The price rise is the difference between the last purchase and the new selling price. These price changes are charted and released on their various indexes. The index normalizes the data to 100 with the base year of January 2000, which represents when the home was at 100% of its value so prices can be more easily compared over time.

While the Case-Shiller Index provides various weightings to each figure, how the weighting works isn’t relevant to this article. What matters is that the result is an index showing how the prices of properties in the US have changed over time. It allows people to see whether prices are trending upward or whether they are trending down. This can result in changes to government, lending, and banking policies. Many investors and economists pay attention to the Case-Shiller Index to understand what is happening in the housing market and how it relates to the economy.

Why is housing important to the economy?

The housing market and the economy are closely intertwined. When there are changes in the economy, you will often find economists talking about house prices because they are a good indicator of the strength of an economy. In fact, according to the National Association of Home Builders, the housing market contributes up to 20% of the gross domestic product.

For starters, most homeowners have a mortgage. If house prices fall, homeowners could owe more on their mortgage than their house is worth. This has led some people to stop paying their mortgage, forcing banks to foreclose. This, in turn, could lead to a slower housing market, and with a slower market, fewer new homes built, therefore spilling over into construction causing workers to lose their jobs. With less or no income coming in, people consume less, slowing the economy down further.

Additionally, if people lose their jobs, as often happens in an economic crisis, the banking system can be put under pressure. We have seen this throughout past recessions.

Since a home is often the largest purchase a person makes, they need to feel confident in their job security and the economy to move forward with it. If the economy is slowing or there is doubt with where the economy is headed, people will be less likely to buy a home.

If house prices go up, it isn’t uncommon for people to borrow against the built up equity in their home to pay off debt, pay for college, or address other expenses. This can boost consumer spending, which is always good for an economy.

New housing is typically built when house prices are stable and people have money to spend. This is a boost to the economy. Companies invest in land and building materials, and thousands of people are hired, helping the economy grow.

Alternatives to the Case-Shiller Index

While the Case-Shiller Index is the most common metric used for measuring home prices, there are others. These alternatives utilize slightly different methodologies.

FHFA House Price Index (HPI)

This government-created index was established in 2008 due to the Great Recession. It tracks changes in prices in 400 major metropolitan areas of the U.S. since 1975. The House Price Index is split into multiple indexes. You have your standard home purchases, but the more interesting indexes do something that the Case-Shiller Index doesn’t.

The All Transactions Index includes house sales and appraisals, which gives a larger view of the housing market overall.

FNC Residential Price Index

The FNC Residential Price Index looks at housing sales from the previous month, whereas the Case-Shiller Index compiles three months of data. The FNC also collects its data by zip code in over 150 major metropolitan areas.

HouseCanary Price Index

The HouseCanary Price Index charts housing price changes at the zip code level. This index doesn’t just attempt to track what the current housing market looks like but also aims to provide predictions for the coming three years. This is one of the only indexes that attempt to do this. The other indexes only tell us where prices are now compared to the past, leaving you to extrapolate future pricing information from them.

HouseCanary also has data sets for single-family rentals, fix and flip properties, real estate lending, and the secondary mortgage market.

Bottom Line

Understanding housing trends is critical for economists and investors alike. Since housing makes up such a large portion of the US economy, when this market sours, the rest of the economy tends to follow. Because of this, investors should familiarize themselves with how the Case Shiller Index works and pay attention to the data it releases.

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