The question has frequently been asked – what specific geographic exposure am I getting when I buy the New York, Miami, San Fran, or any other contracts.
Page 8 of the S&P/Case-Shiller Home Price Indices Methodology report (found in the Reports section here) lists the areas covered, by county, for each regional index. In reviewing the lists, one can see that these are not strictly “City” indices in that home prices some distance from each city’s downtwon area are included. (Anyone intending to trade any product referencing the S&P Case-Shiller index shoud read the complete report to understand not only the reference geographic areas, but all other aspects of the index calculations.
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In addition I’ve attached here a map from MacroMarkets (Robert Shiller’s firm) that highlights the span of the New York index, as an example. A New Yorker may appreciate that home prices in an area that stetches from New Haven, Ct. to Duchess County, north of NYC, down to Ocean County in NJ on the shore, may not all move in unison with the rest of the regional index area. There’s a tradeoff in that the larger the reference area, the greater the number of possible repeat-sales, and the more current, robust and accurate the index. The advantage of fewer, larger regions, is that you not only elimate nuances of a particular town, but you avoid fracturing trading into an excessive number of regional contracts, each of which would have much less liquidity.
While somewhat dispersed, the NYM index performance has been genearlly reflective of broad changes in local real estate repeat sales, for many areas, as much of the area’s home price movements may be tied to the fortunes of the New York City economy. (As an exercise map what you think your own home has been worth at various point in time over the last 10 years and see if it’s tracked the index.)
Does a large regional index introduce some basis risk between a house in one town versus the larger region? Of course, but many indices and commodity contracts (such as the CME Home Price futures contracts) have that basis risk in either how reference obligations are defined, or in the seller’s ability to deliver different assets. It’s just the trade-off that’s made to create an index (or a contract) that can be viable for hedging regional systemic risk.
The same could be argued for each of the other 9 regional indices. Please refer to the MacroMarket website http://www.macromarkets.com/real-estate/ for maps of the those regions.