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Conflicting Home Price Data: What Do They Mean?

This morning, two seemingly contradictory sets of home price data came out. Let's try to explain why they are different.

The first was the widely watched Standard & Poor's/Case-Shiller home price indexes, which showed that home prices increased in the second quarter of this year compared to the first quarter, by a rate of 2.9 percent.

The second was the Federal Housing Finance Agency (FHFA) home price data, which showed a .7 percent decline in home prices in the second quarter of this year, compared to the first.

What gives?

The answer is pretty simple but the analysis may be more complicated.

Simply, the FHFA index surveys only home prices that have Fannie and Freddie mortgages attached to them.

The Case-Shiller index surveys home prices regardless of who services the mortgage.

So now the question is: Why are home prices falling for those that have Fannie and Freddie mortgages?

First off, the FHFA numbers are probably a better sample, because they represent the nation's largest database of "conventional, conforming mortgage transactions," says the FHFA. Fannie and Freddie combine to own or insure about 58 percent of all single-family home loans.

Second, the FHFA data use home prices from both sales and refinancings, where Case-Shiller uses sales only.

Third, Case-Shiller does not include data from 13 states.

And finally, and perhaps most importantly, Case-Shiller is "value-weighted," which means that price trends for more expensive homes move the index more than price trends for lower-priced homes.

Essentially, Case-Shiller can be seen as an index of mid- to luxury-home sales, where FHFA's numbers weight across all home prices, from low-end to luxury.

On CBNC this morning, index founder Robert Shiller delivered some sobering news that may dampen any enthusiasm about today's home price data: He said it will take five years for home prices to increase 6 percent from where they are now.

-- Frank Ahrens
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By Frank Ahrens  |  August 25, 2009; 12:17 PM ET
Categories:  The Ticker  | Tags: Case-Shiller, FHFA, Fannie Mae, Freddie Mac, home prices  
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