Internationally known -- and admired -- economist Karl Case, Emeritus Professor at Wellesley College, known universally as Chip, passed away on Friday, July 15, 2016. You can find obituaries at the Boston Globe and the Wall Street Journal. This fall, a memorial event in Chip's honor will be held, at a time and place to be determined.
Among economists, and many others, Chip was probably best known for his housing price index work, much of it with his close friend, Yale's Robert Shiller. The Case-Shiller home price indexes, now owned and maintained by CoreLogic, and distributed by them and also by Standard and Poor's, are among the most closely followed housing price indexes, and as discussed briefly below, spawned and/or improved several other widely followed price indexes.In 2012, Wisconsin's James A. Graaskamp Center for Real Estate was honored to have Chip present the keynote address at our annual Wisconsin Real Estate and Economic Outlook Conference (see photo to left).
An Appreciation by Colleagues
In December of 2007, the Lincoln Institute of Land Policy sponsored a conference on "Housing and the Built Environment: Access, Finance, Policy," to honor Chip. Chip's connections to the Lincoln Institute go back to his PhD dissertation (on Boston's property tax), but he also served Lincoln for many years as a faculty member and board member.
Based on the papers presented at that session, two of Chip's peers, Harvard's Ed Glaeser and the late John Quigley, edited a volume in honor of Chip in 2009; their introduction, and the foreword by Greg Ingram, provide a nice, concise introduction to Chip's research agenda as well as some personal anecdotes. The individual chapters, while not by Chip, do give you a good overall view of his research interests and touch on some of his many contributions. You can download Ed and John's introduction, and Greg's foreword, for free at:
Housing Markets and the Economy: Risk, Regulation and Policy; Essays in Honor of Karl E. Case. Lincoln Institute of Land Policy, 2009.
The individual chapters, not by Professor Case but by a sampling of his friends and admirers, give a taste of his research interests and accomplishments. Here's the Table of Contents, with links to abstracts and/or working paper versions where available. (The book also includes a number of short commentaries, including one by yours truly):
Karl E. Case, housing, and the economy / Edward L. Glaeser and John M. Quigley
Derivatives markets for home prices / Robert J. Shiller
Home equity insurance : a pilot project / Andrew Caplin, Will Goetzmann, Eric Hangen, Barry Nalebuff, Elisabeth Prentice, John Rodkin, Tom Skinner, and Matt Spiegel
Spatial variation in the risk of home owning / Todd Sinai
Arbitrage in housing markets / Edward L. Glaeser and Joseph Gyourko
Subprime mortgages : what, where, and to whom? / Chris Mayer and Karen Pence
Government-sponsored enterprises, the Community Reinvestment Act, and home ownership in targeted underserved neighborhoods / Stuart A. Gabriel and Stuart S. Rosenthal
Siting, spillovers, and segregation : a reexamination of the Low-Income Housing Tax Credit program / Ingrid Gould Ellen, Katherine M. O'Regan, and Ioan Voicu
Measuring land use regulations and their effects in the housing market / John M. Quigley, Steven Raphael, and Larry A. Rosenthal
Do real estate agents compete on price? : evidence from seven metropolitan areas / Ann B. Schnare and Robert Kulick
The role of job creation and job destruction dynamics / Nancy E. Wallace and Donald W. Walls
Economics blogger David Warsh, another friend, wrote a really nice personal appreciation of Chip that appeared as a postscript in the 2009 volume, which is also available at Warsh's blog.
Some of Chip Case's Research
The aforementioned Lincoln Institute volume is a good introduction to Chip's interests, and a sign of the esteem in which he was held by colleagues. But nothing is a substitute for reading, and thinking carefully about, some of Chip's own papers.
Chip has written dozens of papers and articles. I'll discuss one of my particular favorites at some length; then make shorter comments about a few others.
Measuring Housing Prices, and Housing Market Efficiency
Accurately measuring housing prices is a complicated endeavor. What is the “price” of housing, anyway? Every house is more or less unique, in terms of size, quality, associated services, and of course: "location, location, location." If I pay $1,000/ month rent and you pay $1,200, who’s paying a higher price? If our units are nearly identical, you do. If your apartment is 1500 square feet and mine is 500, maybe I do. But to take another example, if your apartment is in midtown Manhattan and mine is in Madison, maybe I do. How do we handle many characteristics at once?
Economists have an ever-expanding toolkit for measuring housing prices: for example, simple medians of sales prices, rents or values; so-called Laspeyres or Paasche or chain price indexes, like the various housing components of the Consumer Price Index; and so-called hedonic models that use regression techniques to control for the aforementioned differences in size, quality, location and so forth. Finally, thanks in large part to the efforts of Chip Case and Bob Shiller, so-called repeat-sales indexes (RSI) are becoming popular for estimating price changes, if appropriate data are available.
An introduction to the various methods, and some of their pros and cons, can be found in the Primer on U.S. Housing Markets and Housing Policy that Richard Green and myself wrote a decade ago. Here we'll limit ourselves to the RSI of Case and Shiller and others.
Repeat Sales Indexes
The best way to understand how repeat sales indexes work is to look at an example. The figure shows a graph of 17 properties that sold twice in the Shorewood Hills neighborhood of Madison, Wisconsin, in the late 1980s and early 1990s. Each property is numbered from 1 to 17, and each property appears twice. The Y-axis is the logarithm of the selling price of the unit. By the property of logarithms, the slope of these lines are approximately the percentage changes in the units' prices between first and second sale.
The repeat sales estimator in effect measures the average slope of the lines in this figure, year by year. In a classic paper, Bailey, Muth, and Nourse (1963) illustrated how to compute this, using regression methods and a larger sample than we show in the figure.
In their now equally classic paper, their 1988 "The Efficiency of the Market for Single-family Homes," Case and Shiller constructed their own version of these price indexes, for Atlanta, Chicago, Dallas and San Francisco, from 1970 to 1986. In addition to the indexes themselves, Chip and Bob presented what was, at the time, the most sophisticated tests of housing market efficiency.
There are alternative definitions of market efficiency; for our purposes, we'll simply think of it as a market in which there is no systematic trading strategy that can yield excess profits, i.e. beyond the "normal" profit rate for holding an asset of those particular risk characteristics.
Geek alert! Heteroskedasticity discussion below!
The "Ordinary Least Squares" regression technique recommended by Bailey, Muth and Nourse, similar to the technique most of us used in our first year of college statistics, assumes that errors are "homoskedastic," i.e. that the variance of the error term is constant throughout the sample/over time. But real house prices may increase over time; and nominal house prices (from which the first stage of repeat sales indexes are calculated) certainly increase over time. This scaling effect means that the variance of the error term will increase over time. As any econometrics text will demonstrate, OLS in the presence of "heteroskedasticity" is still unbiased and consistent; but estimates will be, "inefficient," not in the finance textbook sense of the term, but in the stat textbook's: yielding the smallest expected sampling error.
Since repeat sales use a limited dataset (properties have to sell twice, at least!) efficiency gains may be useful in measuring price changes; in testing hypotheses regarding the variance of the error term itself (as in tests of market efficiency), they are essential to avoid bias in such tests. Case and Shiller (1988) shows how to use Generalized Least Squares (GLS) weighted repeat sales estimates that account for increases in variances as the interval between sales increases.
Housing Market Efficiency
After these corrections, Case and Shiller find that “a change in real citywide housing prices in a given year tends to predict a change in the same direction, and one-quarter to one-half as large in magnitude, the following year.” Like any great paper, theirs answers a few questions and raises others: as they point out, just because there is serial correlation in house price changes, much more than we'd every see in, for example, stock markets, stronger versions of market efficiency are contradicted only if one can effectively and successfully trade on the perceived inefficiencies.
If we see a pattern in stock prices, it's not hard to trade on it: every S&P 500 stock trades thousands of times a day, and all I have to do to trade is to go online or call my broker. Trading a house is another deal entirely. Transaction costs are high, and need to be incorporated.
Many other improvements in repeat sales measures have been implemented over time, e.g. adjustments for depreciation, rehabilitation, and the like. So Chip and Bob's paper was the beginning of a large research agenda carried out by them and by others. That single paper has been cited over 1700 times; there are tenured academics whose entire corpus of research has not been as widely cited as this one paper. Other follow up by Chip and Bob has focused on collecting data on actual homeowners' expectations about the future of housing prices, and on bringing important insights from psychology into our economic models.
Housing's Effect on the Aggregate Economy
Let me now skip to a more recent paper. In 2005, Chip and Bob were joined by John Quigley; they wanted to examine how housing markets affect the overall economy. Their paper, "Comparing Wealth Effects: The Stock Market versus the Housing Market," has also had a big impact, with some 1400 citations.
Both the international data and the U.S. data show economically meaningful and statistically significant effects of changes in housing wealth on consumption, and hence on GDP. (Recall that in the U.S. consumption is nearly 70 percent of GDP in recent years). Representative results suggest that for a 10 percent increase in housing wealth, consumption increases by between 0.4 percent and 1.1 percent, depending on data set and model. Now, this might seem like a modest effect, but remember that housing wealth is a very large stock -- currently estimated at about $30 trillion -- and consumption is a flow, year after year. Applying those coefficients to a $30 trillion housing stock and an $18 trillion GDP suggests a 10 percent change in housing prices calls forth an annual change in consumption of between $50 and $140 billion; not as large as some previous estimates, but by no means a negligible macroeconomic effect.
Lots more to be done here, too, of course, which is why this paper is so heavily cited. Some research,such as that by my friends Morris Davis and Michael Palumbo, presents estimates that suggest the wealth effect could be even larger. We'll certainly learn more about this subject in the years ahead, thanks in no small part to Chip's efforts.
Local Public Finance
I've already mentioned that Chip's PhD dissertation was about property taxes; throughout his career he returned to local public finance and expenditure, including education policy. One of his best known papers in this area, co-authored with Katherine Bradbury and Chris Mayer, is "Property Tax Limits, Local Fiscal Behavior, and Property Values: Evidence from Massachusetts Under Proposition 2 1/2."
In 1978, California famously passed a ballot initiative, Proposition 13, that capped property taxes and instituted a set of complex fiscal rules that, over time, have hamstrung California's schools, as David Figlio has shown. Slightly less well known are the caps placed on property taxes in Massachusetts, known as Prop 2 1/2. The name comes from key parameters: the Proposition caps the effective property tax rate at 2.5 percent of assessed value, and limits nominal annual growth in property tax revenues to 2.5 percent, unless residents pass a local referendum allowing a greater increase.
Their research found that Prop 2 1/2 adversely affected local house prices. Controlling for other effects, house prices performed worse in communities that had slower increases in spending, suggesting that Proposition 2 1/2 led communities to spend ‘too little’ on services. Local governments did not always optimize their spending mix. Bradbury, Mayer and Case found that increases in school spending increased house prices, ceteris paribus; but the effect of the non-school spending variable was not statistically different from zero.
John M. Quigley Medal
The leading academic organization in our field is the American Real Estate and Urban Economics Association (AREUEA). By acclamation, in 2014, Chip was chosen as the first recipient of the John M. Quigley Medal for Advancing Real Estate and Urban Economics. Named for Berkeley's late John Quigley, coincidentally one of Chip's good friends, the medal honors those who "have produced a record of scholarship that opens up new avenues of inquiry, have a demonstrated record of mentorship of young scholars, have supported institutional advances within these fields, or have been particularly effective at dissemination of these fields to public and professional practices." To read the Quigley Medal precis is to read a brief summary of Chip's career.
Selected Other Honors and Affiliations
At his retirement from Wellesley he held the Katharine Coman and A. Barton Hepburn Professor of Economics at Wellesley College.
Chip was also a Senior Fellow at Harvard's Joint Center for Housing Studies.
Fellow of the Weimer School of Advanced Real Estate Studies of the Homer Hoyt Institute.
Member of the Board of Directors of the Depositors Insurance Fund of Massachusetts.
Academic Advisory Board of the Federal Reserve Bank of Boston.
Allyn Young Teaching Prize, Harvard University.
Founding partner in the real estate research firm of Fiserv Case Shiller Weiss, Inc.
Member of the Board of Directors of the Mortgage Guaranty Insurance Corporation (MGIC).
Three years active service in the U.S. Army.
Chip Case, Master Teacher
Chip taught economics at Wellesley College for 34 years; even after his 2010 retirement, he remained connected to the school and its students. By all accounts, he was a master teacher, inside the classroom and out. Over the years Chip and his wife Susan hosted over three dozen international Wellesley students, "offering them a home away from home," as the Globe's obituary noted. To quote from the Journal's obituary,
“Chip was our most popular draw for alumni,” said Jessica Shlasko, a former student who later became executive director of the college alumnae association. In editing the alumni magazine, “I don’t think there was a single edition without a wedding photo of all these [former] students with Chip,” she said. For reunions, “every single class would call and request him as a speaker.”Chip's Principles of Economics, a basic text coauthored with Ray C. Fair and Sharon Oster, is in its ninth edition and has been adopted at more than 500 colleges and universities.
More Sides of Chip Case
Chip wasn't satisfied with limiting himself to academic research on housing prices; he wanted to make the market more efficient, and to reduce the risks faced by households that often have the majority of their wealth tied up in a single house in a single market. That's what led him to join Bob Shiller, and Shiller's former student Allen Weiss, to institutionalize their price indexes -- now owned and maintained by CoreLogic -- and to attempt to create a futures market in housing prices at the Chicago Mercantile Exchange.
For many years, Chip lived with Parkinson's disease. He was matter-of-fact about it, many of us would say quietly brave. He didn't talk about it at length, and when he did, it was never to solicit anything on his own behalf, but rather to shine a light on the disease. He was very supportive of research and treatment of others, for example serving as a member of the Challenge Team of the Michael J. Fox Foundation's Parkinson's Data Challenge. He was aggressive in taking charge of his own life, traveling widely. I remember being agog at his portable drugstore and the efforts he made to join a number of us gathered by Gavin Wood at the Royal Melbourne Institute of Technology in Melbourne a few years ago, where he served as our keynoter -- plus he made the 24 hour trip by coach so he could save the conference organizers a substantial sum (and apply a small portion of the savings to some golf!)
Compounding his health problems, several years ago Chip was diagnosed with multiple myeloma, a difficult cancer that attacks the body's immune system and causes cancer cells to accumulate in bone marrow. Thanks to the hospitality extended to us, and to so many others, by Chip's wonderful wife Susie, Joan and I were able to visit them at their home a few times in the past year. It was clear his health problems were serious, but they never interfered with a good time at the Case home.
Another of Chip's avocations was his unofficial position as Housing Poet Laureate (certainly since fellow housing economist/poet Steve Mayo's 1999 passing, which called forth one of Chip's best poems. More readily available is the poem he wrote in honor of friend Bob Shiller's Nobel Prize in Economics -- naturally enough, about housing bubbles. While Chip was a good poet for a housing economist, he was of course not his household's top poet -- that distinction goes to daughter Kristen Case, published poet and Associate Professor of English at University of Maine at Farmington.
Ironically, my wife and I have just moved to Newton, Mass. a week before Chip's death. Were Chip still with us, in addition to improving my economics, I know he'd be trying to convert me from my boyhood love of the Philadelphia Phillies, to my new home town's, and his beloved, Boston Red Sox. Well, I have to say watching David Ortiz smack around young pitchers helps make the case!
Chip was also well known as a country music aficionado. I am a tyro on country music compared to Chip, but we shared a special fondness for David Allen Coe's rendition of Steve Goodman's "You Never Even Called Me by My Name (a.k.a. The Perfect Country and Western Song.) I think I'll be playing it more than usual for a while.
Forthcoming Memorial Event
There will be an event honoring Chip at the Wellesley College Field House, Sunday, October 23, 2015, from 2 to 4 pm.
Selected Papers of Karl Case, and References Cited
Bailey, Martin J, Richard F Muth, and Hugh O Nourse. "A Regression Method for Real Estate Price Index Construction." Journal of the American Statistical Association 58, no. 304 (1963): 933-42.
Bradbury, Katharine L, Christopher J Mayer, and Karl E Case. "Property Tax Limits, Local Fiscal Behavior, and Property Values: Evidence from Massachusetts under Proposition 212." Journal of Public Economics 80, no. 2 (2001): 287-311.
Case, Karl E. "The Central Role of Home Prices in the Current Financial Crisis: How Will the Market Clear?". Brookings Papers on Economic Activity 2 (2008): 161-93.
———. "The Real Estate Cycle and the Economy: Consequences of the Massachusetts Boom of 1984-87." Urban Studies 29, no. 2 (1992): 171-83.
———. "The Value of Land in the United States: 1975-2005." In Land Policies and Their Outcomes, edited by Gregory K Ingram and Yu-Hong Hong. 127-47. Cambridge, MA: Lincoln Institute of Land Policy, 2007.
Case, Karl E, Ray C Fair, and Sharon C Oster. Principles of Microeconomics. Pearson, 2011.
Case, Karl E, and Christopher J Mayer. "The Housing Cycle in Eastern Massachusetts: Variations among Cities and Towns." New England Economic Review (1995): 24-41.
———. "Housing Price Dynamics within a Metropolitan Area." Regional Science and Urban Economics 26, no. 3-4 (1996): 387-407.
Case, Karl E, and John M Quigley. "How Housing Booms Unwind: Income Effects, Wealth Effects, and Feedbacks through Financial Markets." European Journal of Housing Policy 8, no. 2 (2008): 161-80.
———. "How Housing Busts End: Home Prices, User Cost, and Rigidities During Down Cycles." The Blackwell Companion to the Economics of Housing (2010): 459-80.
Case, Karl E, John M Quigley, and Robert J Shiller. "Comparing Wealth Effects: The Stock Market Versus the Housing Market." Advances in Macroeconomics 5, no. 1 (2005).
Case, Karl E, and Robert J Shiller. "Decade of Boom and Bust in the Prices of Single Family Homes: Boston and Los Angeles." New England Economic Review (1994): 40-51.
Case, Karl E, and Robert J Shiller. "The Behavior of Home Buyers in Boom and Post-Boom Markets." New England Economic Review, no. November (1988): 29-46.
———. "The Efficiency of the Market for Single-Family Homes." American Economic Review 79, no. 1 (March 1989): 125-37.
———. "Forecasting Prices and Excess Returns in the Housing Market." Real Estate Economics 18, no. 3 (1990): 253-73.
———. "Is There a Bubble in the Housing Market?" Brookings Papers on Economic Activity, no. 2 (2003): 299-363.
———. "Prices of Single-Family Homes since 1970: New Indexes for Four Cities." New England Economic Review (September/October 1987): 45-56.
Case, Karl E, Robert J Shiller, and Anne Thompson. "What Have They Been Thinking? Home Buyer Behavior in Hot and Cold Markets." National Bureau of Economic Research, 2012.
Case, Karl E, Robert J Shiller, and Allan N Weiss. "Index-Based Futures and Options Markets in Real Estate." The Journal of Portfolio Management 19, no. 2 (1993): 83-92.
Davis, Morris A. and Michael G. Palumbo. "A Primer on the Economics and Time Series Econometrics of Wealth Effects." Washington, D.C.: Board of Governors of the Federal Reserve System, 2001.
Figlio, David N. "Did the “Tax Revolt” Reduce School Performance?" Journal of Public Economics 65, no. 3 (1997): 245-69.
Green, Richard K., and Stephen Malpezzi. A Primer on U.S. Housing Markets and Housing Policy. American Real Estate and Urban Economics Association Monograph Series. Washington, D.C.: Urban Institute Press, 2003.
Musgrave, Richard A, Karl E Case, and Herman Leonard. "The Distribution of Fiscal Burdens and Benefits." Public Finance Review 2, no. 3 (1974): 259-311.
Credits
Photograph by Steve Becker Photography
What a wonderful tribute to Chip! Thanks so much for providing this public service.
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