Continuing our discussion from last time, today we’ll talk about indexing.
The Case-Shiller Index was initially developed by professors and it has since been transferred over to the St. Louis Federal Reserve to manage. Essentially, it’s an index of prices calculated by looking at the same house’s sales over different periods.
With an index, you’re not looking at prices, but rather a value relative to 100. For this index, January 1987 is deemed to be 100 and is the baseline. Indices above 100 show that prices have increased over the 1987 value, and if they’re below 100, prices have gone down.
If a house sold in the year 2000 and again in 2010, it will fit into the appreciation between those two years. If it sells again in 2021, it’ll be used to calculate the growth from there.
The Case-Shiller Index looks at 20 markets and provides an individual index for each. They’ll look at every single-family home sale and extrapolate from those what a particular house could sell for.
Why is the Case-Shiller Index sometimes more useful than averages, means, and median prices? Well, trends change over time. Back in the early 2000s, everybody wanted the biggest house they could get, which skewed the mean and median because they weren’t looking at the same house. Perhaps the average house had been 2,000 square feet, but with the addition of all the monster houses, the average became 2,400 square feet. Saying the market was up 10% would be misleading.
The Case-Shiller Index looks at the same house in different time periods to tell you what’s really happening in a specific neighborhood. So whenever I quote prices, I’ll always quote the mean, median, and the Case-Shiller Index because they’ll all three give you different information.
If you have any questions about the index or how this works, don’t hesitate to reach out to us so we can speak more in-depth.
