Case-Shiller Expected to Show Continued Inflated Appreciation

The Case-Shiller data for October came out this morning, and based on this information and the November 2013 Zillow Home Value Index (ZHVI, released December 19th) we predict that next month’s Case-Shiller data (November 2013) will show that both the non-seasonally adjusted (NSA) 20-City Composite Home Price Index and the NSA 10-City Composite Home Price Index increased 13.7 percent on a year-over-year basis. The seasonally adjusted (SA) month-over-month change from October to November will be 0.6 percent for both the 20-City Composite and the 10-City Composite Home Price Indices (SA). All forecasts are shown in the table below. Officially, the Case-Shiller Composite Home Price Indices for November will not be released until Tuesday, Jan. 28.





The Zillow Home Value Index continues to show moderation in home value appreciation, with several of the largest metros showing month-over-month declines in November, as well as a fair amount of volatility in home value growth as the housing recovery continues. Case-Shiller indices have also shown slowdowns in monthly appreciation, but have not yet recorded monthly declines (at least not in their seasonally-adjusted monthly numbers). For the Composite Indices, monthly appreciation in October was up 1 percent, which is very strong monthly growth – compared with 0.6 percent appreciation for the national ZHVI in November. Even when the Case-Shiller indices do begin to show monthly depreciation in some areas, they will continue to show an inflated picture of home prices, especially when considering year-over-year growth. The Case-Shiller indices are biased toward the large, coastal metros currently seeing enormous home value gains, and they include foreclosure resales. The inclusion of foreclosure resales disproportionately boosts the index when these properties sell again for much higher prices — not just because of market improvements, but also because the sales are no longer distressed.

In contrast, the ZHVI does not include foreclosure resales and shows home values for November 2013 up 7.1 percent from year-ago levels. More on the differences between a repeat sales index, including the Case-Shiller indices, and an imputed hedonic index like the ZHVI can be found here. We expect home value appreciation to continue to moderate through the end of 2013 and into 2014, rising 4.6 percent between November 2013 and November 2014 — a rate much more in line with historic appreciation rates. The main drivers of this moderation include rising mortgage rates and less investor participation – leading to decreased demand – and increasing for-sale inventory supply. Further details on our forecast of home values can be found here, and more on Zillow’s full November 2013 report can be found here.

To get some sense of where home values will go over the next 5 years, please refer to the Zillow Home Price Expectations Survey, which includes input from more than 100 economists. These panelists predict the five-year path of the ZHVI, not the Case-Shiller index. The latest Zillow Home Price Expectations Survey (2013 Q4), which came out on Nov. 7, and can be found here.

To forecast the Case-Shiller indices, we use the October Case-Shiller index level, as well as the November Zillow Home Value Index (ZHVI), which is available more than a month in advance of the Case-Shiller index, paired with November foreclosure resale numbers, which Zillow also publishes more than a month prior to the release of the Case-Shiller index. Together, these data points enable us to reliably forecast the Case-Shiller 10-City and 20-City Composite indices.