The Division of Repeat Sales Pairs into Price Tiers
For the purpose of constructing the three tier indices, price breakpoints between low-tier
and middle-tier properties and price breakpoints between middle-tier and upper-tier
properties are computed using all sales for each period, so that there are the same number
of sales, after accounting for exclusions, in each of the three tiers. The breakpoints are
smoothed through time to eliminate seasonal and other transient variation. Each repeatsale
pair is then allocated to one of the three tiers depending on first sale price, resulting
in a repeat sales pairs data set divided into thirds. The same methods used for the Metro
Area Indices are applied separately to each of these three data sets to produce the Low-
Tier, Medium-Tier and High-Tier Indices.
Note that the allocation into tiers is made according to first sale price. Individual
properties may shift between price tiers from one sale date to the next. We use only the
tier of the first sale, ignoring the tier of the second sale. This allocation was chosen so
that each of the tier indices closely represents a portfolio of homes that could be
constructed on each date using information actually available on that date. Thus, the tier
indices are essentially replicable by forming a portfolio of houses in real time. The Low-
Tier index for a metro area is an indicator of a strategy of buying homes falling in the
bottom third of sale prices (while the High Tier Index as an indicator of a strategy of
buying homes in the top third of sale prices) and holding them as investments for as long
as the homeowner lived in the home. The trend of home price indices in each of the three
tiers reflects the outcome of such an investment strategy.
A “value effect,” has been noted in the tier indices: low-tier indices have typically
appreciated somewhat more than high-tier indices. Part of this value effect may be
analogous to the effect that motivates value-investing strategies in the stock market.
Individual homes’ prices have shown some tendency to mean revert, so purchasing lowpriced
homes may have been an overall good investment strategy. We do not know
whether this value effect will continue into the future, and the value effect has not been
stable through time even in the historic sample that we have observed.
The high-tier indices will tend to lie closer to the aggregate indices than do the low-tier
indices. This is as we would expect, since the aggregate indices are value-weighted and
hence the high-tier repeat sales figure more prominently in the aggregate indices.
