Florida REALTORS® next month will be rolling out a home price index that tries to give its members a clearer picture of price movement than you can get in an index that tracks changes in the median home price, which is what a lot of price indexes do. It’s an ambitious and complicated undertaking, and it’ll take some time for the database to be robust enough to really give a clear picture of what’s happening, but the effort is promising.
Florida REALTORS® new index will be what’s known as a same-sale index, which means it’ll track sale prices of the same houses over time, so when prices go up or down in the aggregate, you’re seeing actual changes in the value of the same basket of assets over time. This provides an important distinction from indexes that look at changes in the median price, because lots of factors can influence changes in the median price, including changes in the mix of houses being sold.
In a median-price-based index, for example, most of the sales one month might be of homes in the lower price points; the next month, they might be mostly of higher-end homes. That would show a rise in the median-home price when in fact the price change only reflects a change in the mix of houses that were sold. A same-sale index corrects for that because you’re seeing actual appreciation or depreciation in value of the same houses.
That’s the ideal, at any rate. Like any index, you still have to make assumptions and remove from the data anomalies that can distort what’s happening in the market. For example, you have to be able to identify house price increases that stem from, say, a renovation or addition. If a house in 2008 sells for $200,000 and in 2012 sells for $300,000, a 50 percent increase, it presents an anomaly that you have to account for if prices of other houses in the area go up only 10 percent during that same period.
So, the tracking program has to be able to identify anomalies like that and remove them from the database. Other types of anomalies might be non-arm’s-length transactions, in which a family member sells a house to another family member for a below-market price, or a house that becomes damaged in a storm, so its drop in value isn’t reflective of changes in the market.
Setting up a program to track these anomalies in the database is one of the challenges to making the same-sales index work. “You have to have someone who’s familiar with working with large databases and you have to have someone who’s adept at programming, so they can in fact [scrub] the data and get the index correct,” says John Tuccillo, Florida REALTORS® chief economist, whose team is producing the new index. Tuccillo is a past NAR chief economist.
For the Florida effort, the team is using publicly available data going back to 1995 from the state’s Department of Revenue, and they’re now adding in the latest available data from that source, which is from 2011.
Using this data comes with another challenge. Although it’s accurate because it reflects closed sales, it takes a while before the data is available. The Florida REALTORS® team is adding 2011 data only now because that data was only just made available—more than six months into the new year.
Tuccillo says they’ll address this time lag going forward with quarterly updates using state MLS data, which they’ll square with the actual 2012 numbers once the state’s data becomes available in the middle of next year. “Going forward, we’re going to use tax identification numbers to link the MLS database into our Department of Revenue database,” Tuccillo says. “So, we can update the index quarterly by sampling out of MLS. We can do enough of a sample to get a good idea of what’s happening with prices. A year from now, when 2012 data is available, we’ll be able to do a revision of the index using the entire population [of data].”
None of this will change the way the association tracks home sales volume; it’ll continue using MLS data to track that. But by using its new same-sales method on pricing, REALTORS® in the state can anticipate getting an informative picture on where the market is going.
You can read more about Florida REALTORS®’ new index on the association’s website.