The S&P/Case-Shiller Home Price Indices were released on Tuesday and documented the dismal state of the U.S. housing market. For instance, the results for the S&P/Case-Shiller Composite Index of 20 cities showed a price decline of 15.3 percent when comparing the three months ending in April of 2008 with the similar period last year.

All 20 cities in the index showed a decline. Charlotte looked the best with a fall of only 0.1 percent while at the other end of the spectrum were Las Vegas (-26.8 percent), Miami (-26.7 percent) and Phoenix (-25.0 percent). Home prices have fallen by slightly greater magnitudes from their peaks, with the 20-City Composite off 17.8 percent and a range of -3 percent for Charlotte to -29.3 percent in Las Vegas.

As most home owners know, real estate in many parts of the country has a seasonal rhythm, with buyers more active in spring and less so in fall and winter. This pattern also applies to home prices, and causes prices to be relatively stronger in the spring and weaker later in the year. The following chart of the S&P/Case-Shiller Home 10-City Composite illustrates this pattern quite clearly (I'm using the 10-City Composite, as there is more history.)

The thin blue line shows the results of taking the reported number from S&P, which is a three-month average, and comparing it to the prior three months on an annualized basis. The thick green line shows the current three-month average percentage change on a year-over-year basis.

As you will notice, the rolling quarter-on-quarter annualized number generally shoots up past the yearly data in the spring and drops below it in the fall. In fact, over this 20-year period, the data for the three months ending in April is normally right on top of the annual data.

All this explanation is necessary to understand just how weak home prices really are and prevent investors and house shoppers from being tricked by the seasonal variations. As shown in the chart, the 10-City Composite Index rolling three-month data ending in April 2008 shows a 24.1 percent annualized decline, which is well below the 16.3 percent decline in the year-over-year data. This difference of -7.8 percentage points compares with an average difference in the 1988-2007 data of only -0.3 points. Even the very weak years of 1989, 1990, 2006 and 2007 showed more robust results.

S&P's press release clearly highlights the weaknesses in the housing market and the headline correctly heralds the "Steep Declines in Home Prices." But the "silver linings" later in the release are dangerous. A potentially misleading comment is that "If there is anywhere to look for possible improvement, it would be that the pace of monthly declines has slowed down for most markets." As we can see, seasonal patterns may more than account for any observed improvement, as the data is almost always stronger in the early spring. In addition, the release states that "eight of the 20 metro areas were positive for the April-over-March reading" but historically, an average of 69 percent of the markets are positive for this period versus only 40 percent this year.

One would think that with all the brainpower at S&P, seasonal variations would be taken into account and data explained more carefully. I also think it would be helpful if they stopped "mislabeling" information as "monthly," when all the data are three-month averages ending in the month S&P references. Monthly data is not released, so when S&P says "April-over-March," it really means Apr/Mar/Feb versus Mar/Feb/Jan. With a little tongue in cheek, maybe this lack of clarity is one reason for the various agencies' monumental failure to correctly rate mortgage-backed securities.