As we’ve described , the Case-Shiller indices are giving an inflated sense of national home value appreciation because they are biased toward the large, coastal metros currently seeing such enormous home value gains, and because they include foreclosure resales. The inclusion of foreclosure resales disproportionately boosts the index when these properties sell again for much higher prices — not just because of market improvements, but also because the sales are no longer distressed. In contrast, the ZHVI does not include foreclosure resales and shows home values for April 2013 up 5.2 percent from year-ago levels. We expect home value appreciation to continue to moderate in 2013, rising only 4 percent between April 2013 and April 2014. Further details on our forecast of home values can be found here, and more on Zillow’s full April 2013 report can be found here.

To get some sense of where the Case-Shiller Composite-20 index will go over the coming years, the chart below combines 1) the historical trajectory of the index; 2) next month’s forecast based on current Zillow data; and 3) the mean expectation for real estate appreciation over the next five years, based on the Zillow Home Price Expectations Survey, which includes input from more than 100 economists. These panelists actually predict the five-year path of the ZHVI, not the Case-Shiller index, but the future expectations are interesting nonetheless when applied to the current Case-Shiller index levels.

To forecast the Case-Shiller indices, we use the March Case-Shiller index level, as well as the April Zillow Home Value Index (ZHVI), which is available more than a month in advance of the Case-Shiller index, paired with April foreclosure resale numbers, which Zillow also publishes more than a month prior to the release of the Case-Shiller index. Together, these data points enable us to reliably forecast the Case-Shiller 10-City and 20-City Composite indices.

“Are home values really up more than 10 percent year-over-year? Well, yes, if you bought your home in a large coastal metro that had a big housing boom, and you bought a house that was half foreclosure and half non-foreclosure. Otherwise, home values really grew at roughly half this pace over the past year – not bad, and certainly confirmation that the housing market is experiencing a brisk recovery,” said Zillow Chief Economist Dr. Stan Humphries. “Low mortgage rates and high negative equity are leading to very high demand and very low inventory, respectively, creating a kind of witch’s brew of extreme price spikes. The bottom line is that these appreciation rates will slow down. Robust appreciation is not an immediate problem in areas like Phoenix and Las Vegas, which experienced huge price declines and are still very affordable. They are more worrisome in places like some California markets where affordability is no longer driven by home prices, but instead by low mortgage rates – which won’t last.”

Our forecasting model incorporates previous data points of the Case-Shiller series, as well as Zillow Home Value Index data and national foreclosure resales. To see our prediction for next month’s Case-Shiller indices, please click here. To see how Zillow’s forecast of the February Case-Shiller indices compared, see our blog post from last month.