The Flawed Home Price Index Shows Home Values Up 0.8 Percent

Last week, the Case-Shiller Index reported home values up 0.8 percent across 20 tracked markets. The public-sector Federal Housing Finance Agency has reached a similar conclusion.

Reporting on a two-month lag, the government's Home Price Index shows home values up 0.8 percent in April, buoyed by the expiring federal home buyer tax credit and low mortgage rates.  It's a positive signal for a recovering housing market.

But just because the Home Price Index says home values are rising, that doesn't mean they are. The Home Price Index methodology is flawed on multiple fronts.

First, the Home Price Index reports on a 60-day delay. This two-month lag turns the HPI a trailing indicator for the housing market instead of a forward-looking one. If you're a home buyer looking for direction, HPI won't give it to you -- you'll have to get that analysis from your real estate agent.

Second, HPI only accounts for home values in which the home's attached mortgage is backed by Fannie Mae or Freddie Mac.  As the FHA market share grows, fewer homes get included in the HPI sample set, and HPI values may be skewed high or low.

And, third, HPI doesn't account for new home sales -- only repeat ones.  This, too, eliminates a major segment of the market.

All of that said, though, the Home Price Index remains important to housing.  It's still the most comprehensive home valuation model in print and it's been giving strong readings since the start of year.  You can't ignore that on any level.

It's July and you may have missed the "rock bottom" home prices from earlier in the year, but homes are still relatively inexpensive. Couple that with all-time low mortgage rates and home affordability looks excellent. Consider making an offer while the terms are right.