You may have noticed something curious during the final week of August: Standard & Poor's widely-watched Case-Shiller house price index came out with the alarming news that American homes lost 3.2 percent of their market value between mid 2006 and mid 2007. In some areas, such as Detroit (down 11 percent), Tampa (-7.7 percent), Washington D.C. (-7.0 percent) and Phoenix (-6.6 percent), the devaluation was much more dramatic. In 15 of the top 20 bellwether metropolitan markets, said S&P, home values dropped during the year.

The report helped trigger a sell-off on Wall Street, hit the front pages and TV newscasts across the country, and became the latest fodder for housing bust aficionados.

Just two days later, the Office of Federal Housing Enterprise Oversight (OFHEO), released its quarterly survey on the same subject. But its numbers were nearly mirror-image opposites: Year to year second quarter house prices were up by 3.2 percent on average nationally, buoyed in part by strong performances in the Pacific Northwest states, some of the Mountain states, Utah, Texas, Wyoming, and parts of North Carolina, among others. The agency found prices up on average in 226 out of the 287 largest markets.

The OFHEO report, made public the day before the start of the Labor Day holiday, attracted almost no media attention, and generally was backburnered in the publications that mentioned it at all. Though both surveys use a similar "repeat-sales" transaction methodology, the bad news got all the press, and the good news alternative got buried. Most American real estate owners were none the wiser.

Putting aside the media's appetite for the negative and the pre-holiday release of the OFHEO study, how could large, respected national survey organizations arrive at such contradictory conclusions? The answer is buried away in the empirical data sources used by each organization.

The Case-Shiller survey was created to provide market-by-market benchmarks for a new breed of real estate financial instrument: Futures contracts tied to housing price movements, allowing investors to hedge their bets elsewhere on the direction of real estate values in key areas around the country.

The OFHEO House Price Index was created with a totally different objective: To allow the agency, which has regulatory oversight of Fannie Mae and Freddie Mac, to keep track of the value of the collateral backing the two congressionally-chartered corporations' mortgage loan and securities portfolios. OFHEO's data pool is rich -- vast numbers of new loans and refinancings on houses financed by Fannie or Freddie. The data covers every state, drills down to the smallest and most rural of metropolitan markets, and comes with access to appraisals and other loan file details.

However, because it solely consists of Fannie Mae and Freddie Mac-financed properties, the OFHEO database is limited to houses with conforming, conventional loans no greater than $417,000, the current limit for both companies. The data omits FHA/VA loans, jumbo mortgages, most subprime and Alt-A nonconforming loans, and condominiums. It does include refinancings, which OFHEO freely admits tend to come with higher valuations than they would be if the house were sold outright.

The Case-Shiller index, on the other hand, covers houses with mortgages of every type and size, recorded at hundreds of courthouses around the country and scooped up by data aggregators working on contract. It includes no refinancings. More significantly, it has no data whatsoever from 13 states -- including several that OFHEO ranks among the current strongest price gainers -- and has incomplete data from 29 states for a variety of technical and legal reasons. Case-Shiller also weights properties by their values -- so a $250,000 house gets half the statistical weight of a $500,000 house.

These inherent differences, which are virtually never spelled out as potential limitations in press reports, have created indexes that are essentially measuring different pools of houses and price changes. The Case-Shiller index is more heavily weighted toward higher-price markets, such as California, parts of Florida and the Northeast. OFHEO undersamples upper-bracket luxury houses in the same areas, but covers a far wider geographic spectrum than Case-Shiller.

As a result, when high-cost areas on the two coasts saw their appreciation rates take off during the early boom years, Case-Shiller was out in front capturing the big spike upward in those states. Similarly it appears to be out in front on the way down for those states and metro areas, but its national index may be missing some of the positive appreciation apparently underway in states where its data is thin.

You don't have to answer the question, "Which index should I follow?" The fact is, neither index is perfect, neither index is capturing everything going on in home real estate. Follow them both. But don't ignore their built-in limitations, and roll with the newscasts and headlines accordingly.

Published: September 10, 2007

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.