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 macroeconomics.
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 need analysis.
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