Expectation can affect in a positive or negative way the economic reality. Keynes
refers to this “naive” confidence as the “animal spirits”. False expectations that
appear real can misdirect consumer mood and behavior.
Home values are a component of the personal wealth and greatly affect the economy’s
consumer and housing sectors. When the price of houses increase, consumer sentiment
increases and also the consumers' ability to draw from a much improved home equity.
This boosts spending, creating new demand for goods and services.
Housing prices increase also boost homebuilder confidence and encourage new construction
starts, creating new demand for labor and goods. On the other hand, weakness in house
prices have a reverse effect on consumer and housing sectors overall.
As a result, an accurate home price index that has a significant impact on the consumer
or homebuilder sentiment is much needed. The S&P/Case-Shiller Home Price Indices
self-portrait is a reliable and consistent benchmark of housing prices in 10 to 20
major metropolitan areas. It measures the average home price change between arm-lengths
repeat sales of single-family home in a particular metropolitan area.
The S&P/Case-Shiller Home Price Indices for May showed continual strength during
spring. The unadjusted composite 10-index surged 1.2 percent in May, following a
healthy 0.7 percent increase for the previous month. However, RealtyTrac reported
Bank repossessions (REOs) hit a record monthly high for the second month in a row
in May, with a total of 93,777 U.S. properties repossessed by lenders during the
month—an increase of 1% from the previous month and an increase of 44% from May 2009.
All 50 states posted year-over-year increases in REO activity.
Distressed real estate properties will keep prices down. Foreclosures count for almost
30 percent of the all home sales. This is in contrast with the S&P/Case-Shiller Home
Price indicators that show price increases or at most price stabilization. These
home price indicators are distorted because the index methodology, in this case,
weighs down or eliminates data points associated with distressed property sales.
Distorted home price indicators can adversely affect the consumer by increasing expectations
of a stabilized housing market. If these false expectations do not become reality,
the result will be consumer fear. Managing expectations is an important factor in
S&P/Case-Shiller indicates that the indices accuracy depends only on the accuracy
of its data. However, in addition to the input data, initial assumptions are a very
important factor in representing systems' performance and reflecting conditions that
Once assumptions are established, the system boundaries and state are confined and
the output performance data represent that system-state performance. Therefore, selecting
different assumptions can provide different results. When assumptions are far from
real market condition, even with accurate input data, the results will misrepresent
the analysis intend.
The S&P/Case-Shiller Home Price Indices methodology introduces assumptions to control
data quality for the collected sale prices. The intent is to avoid introducing in
the analysis of home prices anomalous prices or idiosyncratic price changes