Experts dispute the validity of home-price indices commonly used in the residential housing industry and often quoted in bold headlines in the press. Recently, a headline in the San Francisco Chronicle reported a "Big drop in October home prices."

This eye-catching lead was based on data from the Standard and Poor’s/Case-Shiller 10-City Composite Index that declined 19.1 percent in October 2008 from a year ago. The S&P 20-city index dropped 18 percent. The San Francisco metropolitan region index plunged a whopping 31 percent.

Experts dispute the validity of home-price indices commonly used in the residential housing industry and often quoted in bold headlines in the press. Recently, a headline in the San Francisco Chronicle reported a "Big drop in October home prices."

This eye-catching lead was based on data from the Standard and Poor’s/Case-Shiller 10-City Composite Index that declined 19.1 percent in October 2008 from a year ago. The S&P 20-city index dropped 18 percent. The San Francisco metropolitan region index plunged a whopping 31 percent.

The Case-Shiller index does not include all homes sold during a time period. It tracks repeat sales. So, only homes that sold two or more times are included. This may or may not be a representative sample of changes in home prices. Another drawback of this, and other home-price indices, is that they are usually based on too broad an area.

For example, the S&P/Case-Shiller San Francisco metropolitan region includes San Francisco, Marin, San Mateo, Alameda and Contra Costa counties. This is an immense area. In choice neighborhoods in San Francisco, Piedmont, Oakland and Berkeley, home prices declined only approximately 7 to 10 percent last year. In areas bloated with unsold inventories of new tract homes and foreclosure sales, like Concord and Brentwood in Contra Costa County, prices dropped more than 40 percent.

Two other widely used home-price indices are the National Association of Realtors (NAR) median existing-home price index and the Federal Housing Finance Agency’s (formerly the Office of Federal Housing Enterprise Oversight) Home Price Index.

The drawback with NAR’s price index is that it measures changes in the median price during a period of time. But, it is not an index of changes in the market value of the homes sold. Half of the homes sold during a period sold for more than the median price and half for less.

When there is more sale activity at the lower end of the market, like the foreclosure sales activity that dominates many markets today, the median price drops. Also, it’s impossible to extrapolate from national statistics to local neighborhoods, other than to say that generally prices are declining rather than advancing.

The FHFA’s monthly House Price Index also has shortcomings. Like the NAR index, it covers the nation. It is a repeat sales index that measures price changes in sales and refinances of same properties. It includes only properties where conforming loans (Fannie Mae and Freddie Mac loans in amounts of $417,000 or less) were used for financing a refinance or purchase. The upper-tier market is excluded, as are foreclosure sales.

It’s not surprising that these three indices produce different results. For example, the S&P/Case-Shiller 20-city index reported that home prices dropped approximately 9 percent in 2007. According to NAR, the median price of existing-homes sold in 2007 declined 1.4 percent. And, the FHFA Home Price Index dropped 0.5 percent.

HOUSE HUNTING TIP: The only way to know for sure the current market value of a home is to put it on the market and sell it. However, this isn’t realistic if you’re trying to determine whether or not now is a good time to sell. You need to research your local market to gauge the approximate selling price of your home at any given time.

A good, reputable real estate agent who knows your neighborhood well can assist you by preparing a current market analysis (CMA) of your home. This will give you a snapshot of recent sales in your area. Make sure it includes the most recent sales, listings that have sold but not yet closed, and active listings.

THE CLOSING: Don’t make a decision on whether or not to buy or sell based on a news headline. Read the entire article. Then research your local market.

Dian Hymer is a nationally syndicated real estate columnist and author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer’s Guide," Chronicle Books.

***

What’s your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story.

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