OFHEO’s House Price Indexes (the “HPI”) and home price indexes produced by S&P/Case Shiller are constructed using the same basic methodology. Both use the repeat-valuations framework initially proposed in the 1960s and later enhanced by Karl Case and Robert Shiller. Important differences between the indexes remain, however. The two models use different data sources and implement the mechanics of the basic algorithm in distinct ways. The table at the end of this note quantifies the extent to which each of the factors causes the two indexes to diverge. An important first step in explaining differences is to ensure that the geographic areas covered by the indexes are identical. While an aggregate U.S. index is published by S&P/Case-Shiller, some details concerning the underlying coverage areas have not been released. Without such information, it is impossible to disentangle the various causes of national index divergences. Based on a review of the methodology documentation that is available, it appears that OFHEO’s national index has broader geographic coverage than the S&P/Case-Shiller National Home Price Index. According to the methodology materials, the S&P/Case-Shiller index does not include house price data from thirteen states. Market conditions in those thirteen states have, on average, been stronger than in the rest of the nation. OFHEO’s estimates indicate, for example, that three of the five fastest appreciating states in the nation (Idaho, Montana, and Wyoming) do not have representation in the S&P/Case-Shiller index. This missing information has likely caused some of the divergence between the trends shown in the two national indexes.

The S&P/Case-Shiller index also apparently has incomplete coverage in another 29 states.3 For these states with incomplete coverage, the documentation provides an estimate for the “percent of state covered by the index,” but does not detail the specific areas for which data are unavailable. To the extent that the missing areas tend to be more rural counties, given that rural areas appear to be exhibiting stronger market conditions in recent periods, the missing data might partially explain why the OFHEO and S&P/Case-Shiller national indexes diverge.