Here's Why The Case-Shiller Home Price Index Stinks

Today, we'll get the February Case-Shiller home price numbers. These are expected to show that average home prices climbed 13% on the year in March and 0.8% on the month.

But this shouldn't necessarily offer comfort to housing bulls. Ian Shepherdson at Pantheon Macroeconomics reminds us that these are just averages, and these averages can be skewed heavily by fluctuating foreclosure sales.

"As foreclosed homes typically sell for much less than regular private sales, a decline in the proportion of foreclosure sales will raise reported prices. The correlation between changes in the proportion of foreclosures and the rate of increase of Case-Shiller home prices is not perfect, but it is real, as our first chart shows.

"Note that Case-Shiller reported prices have risen less quickly than implied by shifts in the foreclosure proportion over the past three quarters, so the impact of the drop in existing home sales is visible in the data. But when we compare the numbers to the median price data from the existing home sales report, it is easy to see why we think Case-Shiller price gains have to slow. By the end of the second quarter, we expect the year-over-year rate to have slowed to about 6-to-8%, which means prices will stop rising on a month-to-month basis. We cannot rule out the idea that the late spring and summer will see a run of absolute declines."

Here's a look at how Case-Shiller data is skewed by foreclosures: