Only One Person Knows a Home's Value: Its Buyer
By CARL BIALIK, WSJ

The good news is your home may be worth more than the rock-bottom price that your neighbors' houses fetched. The bad news: No one but you might think so. The one point of widespread agreement in the real-estate industry is that there is no single accurate index of home prices. They are all over the map, cover different sets of homes and may exclude parts of the country or be unduly influenced by the mix of homes sold in a given month.

As the home market surged earlier this decade, the two leading indicators of home prices diverged. One didn't count homes sold with exotic or sub prime mortgages, which fueled much of the bubble. These same properties are often the ones going on the auction block today at severe discounts, pulling the other home-price index down -- some say to unrealistic lows. To address these discrepancies, indexes are going increasingly local. Other, less-well-known measures of home prices -- some of them available only to paying customers -- are adjusting to exclude homes sold by banks.

Sales of foreclosures and other distressed properties accounted for 35% to 40% of transactions in the third quarter, the National Association of Realtors said this week. The discount on such properties, often sold by banks that need to clear inventory quickly, can be 30% to 40% compared with similar properties sold by the resident, according to Damien Weldon, a vice president of credit-risk products and analytics at First American CoreLogic. The company's Loan Performance division is producing a new index without these discounted sales, a distinction that was "not important a few years ago, but now it's very important," Mr. Weldon says.

"People put all their eggs in the sales-price basket," says Andrew Leventis, a senior economist with the Federal Housing Finance Agency, which produces a home-price index. "Whether the transaction pool is reflective of the entire housing stock -- nobody addresses that problem," adds Karl Case, professor of economics at Wellesley College and co-creator of the Case-Shiller Index, a competitor to the federal government's measure.

"That's the stuff that went down most substantially, and that's probably the stuff that went up most substantially," Prof. Case says. The federal index, though, doesn't include such properties, instead accounting only for properties with financing from mortgage giants Fannie Mae or Freddie Mac. For that reason, many prefer Case-Shiller. "I believe S&P Case-Shiller for the areas it covers," says Thomas Lawler, a housing economist in Leesburg, Va. Case-Shiller has shown a steeper decline in markets with many distressed sales.

Most of the numbers that get headlines are based on metropolitan areas. Yet the housing-market picture can vary dramatically within the same region. Lynn, Mass., a suburb northeast of Boston, saw prices drop 10% in the second quarter compared with a year earlier, according to Wellesley's Prof. Case. Yet in the same period prices in Cambridge, just west of the city, rose 13%.

None of this nuance is captured in headlines about the latest home-price-index release, Prof. Case complains. Still, he is hopeful that home-price indexes will improve. "This new criticism that these indexes are showing different things is going to lead to a lot of research," he says.