Tuesday, December 29, 2009

Is the Case-Shiller Index a useful Real Estate Indicator?

January 29th, 2009

Is the Case-Shiller Index a useful Real Estate Indicator?

The Case-Shiller index says the Twin cities home values declined 16.3% from 2007 through 2008. Does this mean you should adjust every house in the Twin Cities down that much? Even though Edina has seen an INCREASE in market value and Maple Grove values have only dropped 4-6%?

The Case-Shiller index measures the change in price on a particular house from 2000 on. I would contend that it exaggerates the decline because it leans heavy on those houses whose values were puffed up with seller paid closing costs and funny money mortgages. And when those same houses went into foreclosure they may have been in poor condition by the time the banks could offer them for sale, so the prices is also exaggerated on the downside.

Lets look at the history of one house and how the Case Schiller index would have represented it. 3919 Main Street in Columbia Heights is a cute yet quirky 1 bedroom 2 bath 700 square foot house. A family raised 3 kids in this tiny cottage and kept in the family until mom died in 2000 when it was sold to a single guy for $82,500.


Reported Price

Annual Change

Condition Change

Real Price



Annual Change









$99,000.00 (a)





Split off Lot

$97,000 (b)





Many updates

$110,000 (c)





Mold, No FHA

$50,000.00 (d)


(a) I was the selling broker, so in my mind the $3,000 commission I received decreased the price to $99,000.

(b) The $97,000 reflects that I sold the house in 2 weeks and didn't pay a real estate commission. I then split off an excess lot which I sold for $35,000 which isn't reflected in the index.

( c) The sale for $97,000 was a contract for deed. They paid me 8.5% on an interest only loan, paid the taxes, paid the insurance. Life was good. Until I got the notice from the Bankruptcy court. Rick Salmen of Falhaber helped me get the house back. I resold it to this single guy in the peak of funny money mortgages,this one was from Edina Reality Mortgage. On the HUD I paid $13,000 of his closing costs, including paying off his student loans. So while the reported price was $123,000, the actual price was $110,000.

d) I don't believe this deadbeat buyer ever made a payment on the house. But took until June of 2007 for Countrywide to get it back on the market. The final MLS listing indicates a disclosure for mold. I have a mold allergy so I am a walking mold detector. There was no mold in this house while I owned it or I would have got sick when I walked in the house. I do know the house would not have qualified for FHA for a number of reasons. Like there was no bathtub. Like the shower was in the unheated basement (well, there was a sunlamp in the bathroom). In the past with funny money mortgages this didn't matter. Now this house would require a cash buyer.

The point of this example is to show that the Case-Shiller claims to reflect MARKET changes, but I believe its also reflecting CONDITION changes that are attributable to the market.

Where the Case-Shiller index has some relevance is comparing different cities around the country. But as an indication of value for a particular house in the Twin Cities I don't think it has any value.

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