I’ve covered the difference between OFHEO Home Price Appreciation Index and the S&P Case-Schiller Home Price Index data several times. Here’s ONE example: Compare and Contrast on Home Price Appreciation Indices. Both indices of home price appreciation have flaws, but I believe the limited geographic coverage and bias in weighting towards larger homes makes the S&P C-S less reflective of the reality, for the majority of homeowners. I want to focus on the weighting methodology in this post. The S&P C-S is value weighted, and the OFHEO is equal-weighted.

Imagine 11 homes, 10 of which are $100K and 1 which is $1mil.

Imagine the $1mil home sells for $800K but several of the $100K homes sell for $100K. A “value weighted index” registers a 10% drop. An “equal weighted index” registers a 1.8% drop. Which is more “accurate?”

Imagine now that all of the $100K homes sell for $90K, but the $1mil home sells for $1.1 mil. The “value weighted index” registers no change. The “equal weighted index” would register a 9.2% drop. Which is more “accurate?”