Studying Housing Through Distorted Indexes

Floyd Norris:

There is some reason, however, to think that the recent price declines may be overstated by the index. The figures are based on sales of the same home over time, but there is no way to measure changes in the quality of a home.

With many homes now being sold in distress, either because of foreclosure or as “short sales” in which the sales price is below the amount owed and all the proceeds go to the lender, it is likely that some of the homes were in poor condition. In addition, such sales are often made for lower prices than comparable homes could obtain if sold without time pressures. If and when nondistress sales become a larger part of the market, that could cause the index to rise even if the overall market is not getting stronger.