The Unassuming Economist

by: Hites Ahir

Karl E. Case is considered one of the top gurus on housing markets and a pioneer in studying their link to the broader economy. Case was a Professor of Economics Emeritus at Wellesley College, where he taught for 34 years. Afterwards he worked as a Senior Fellow at the Joint Center for Housing Studies at Harvard University. He died on July 15. He was 69.

The index that’s named after him

At 9:00 AM on the last Tuesday of every month, an index that measures house prices of single-family houses in 20 major markets in the United States is released. This release is closely watched by experts across the nation and in other countries as well. It also makes it into headline news on a regular basis. In February 2008, the release of the index “made a particularly big splash [in the news]. It showed that prices fell 8.9 percent in 2007, the largest decline in the index’s 20-year history” (Metro West Magazine). This is the S&P Case-Shiller Home Price Indices and it is named after Karl E. Case and Robert Shiller—a Professor of Economics at Yale University—together they developed the now famous index.

On the importance of the index, “In all of economics, I can’t think of five data construction efforts in the last quarter-century that were larger contributions than the Case-Shiller index”, says Larry Summers—a former Harvard University president and U.S. Treasury during the Clinton Administration  (Boston Globe). In a separate post, Stan Humphries—Chief Analytics Officer and Chief Economist at Zillow Group—says that “Zillow was born out of a groundswell movement among consumers, researchers and policymakers for more data around everything housing in America. And in no small part, that movement itself owes its beginnings to Chip Case’s work at Wellesley College and the groundbreaking home price index that bears his name.” Karl E. Case was also known as “Chip” among his friends.

So what sparked Case’s interest in housing markets and in creating the house price index? “Case became interested in housing prices in 1985, when real-estate values in Massachusetts — fueled by a high-tech boom — skyrocketed and climbed as much as 40 percent in the span of a year” (Boston Globe). But “Case didn’t know much about bubbles. At the time, he was working on an introductory economics textbook with a friend at Yale, Ray C. Fair. So he asked Fair to recommend an expert in bubbles. Fair responded: Mr. Bubble is across the hall. And that’s where the man whose name was destined to be linked with Case’s came in: Robert J. Shiller. (…) Shiller taught Case about finance and bubbles, and Case taught Shiller about real estate” (Metro West Magazine). The rest is history.

The Great Recession comes

In looking for what Case was saying in the run-up to the Great Recession, you would probably come across many articles. Among them, two are joint commentary in the Wall Street Journal with Shiller. Both commentaries provided a stark warning of the upcoming correction in the housing market.

The first commentary of August 2004 says: “We have a problem: a bubble in the housing market in many locations. In a lot of these places the bubble will eventually deflate. The economic consequences will depend on how the deflation occurs.”

The second commentary of August 2006 says: “Unfortunately, there is significant risk of a very bad period, with slow sales, slim commissions, falling prices, rising default and foreclosures, serious trouble in financial markets, and a possible recession sooner than most of us expected. Deterioration in that intangible housing market psychology is the most uncertain factor in the outlook today. Listen hard and watch out.”

After the Great Recession, at a 2014 conference in honor of Shiller, Case presented a poem. The poem is titled: Reflection on the Housing Market: Seven Years After the Fall (Wall Street Journal). Here are few lines from the poem:

It didn’t matter what rate you paid
Or what you made in a year
For a while liquidity led to stupidity
“Just sign and see the cashier”
High LTV’s and Option ARMs
Negative Am’s and more
2-28’s with teaser rates
And ridiculous Fico scores

Beyond the index and the Great Recession

Besides the work that led to developing the index, Case also made important contribution to the real estate market field. In Housing Markets and the Economy: Risk, Regulation and Policy, Edward L. Glaeser—a Professor of Economics at Harvard University and the late John M. Quigley—a former Professor of Economics at UC Berkely, provide an excellent summary of Case’s most influential contributions.

“A major investigation of The Efficiency of the Market for Single-Family Homes, (…), demonstrated how slowly equilibrium in the housing market was achieved. (…) [This] remains the single most influential paper Case has produced”, Glaeser and Quigley writes.

Moreover, “The magnitude and importance of house price fluctuations in affecting consumer welfare led to his important paper explicating the relevance of Index-Based Futures and Options Markets in Real Estate for housing and the real estate market (…). This paper is not among Case’s most widely cited academic works, but it did lead to the practical development of institutions to mediate risk in the housing market. Consumers and investors now trade options on Case-Shiller Home Price Indices for a dozen cities on the Chicago Mercantile Exchange”, notes Glaeser and Quigley.

Also, “In tandem with his studies of housing dynamics, Case has conducted a series of empirical analyses linking local public finance to housing outcomes, especially school expenditures and school quality. His most widely cited paper in local public finance, Property Tax Limits, Local Fiscal Behavior, and Property Values”, according to Glaeser and Quigley.

“Mr. Wellesley”

Even though Case was famous for the S&P Case-Shiller Home Price Indices, he prided himself on his teaching (NPR). A student of Case “recalls spending the third class of her Urban Economics course at Wellesley on a bus touring the Boston area, with Case at a mike explaining the history and challenges of different neighborhoods. For a first-hand lesson in real estate, Case sent students out into the market to go through the motions of buying a house” (Metro West Magazine).

Moreover, “Former students remembered Mr. Case as an exceptionally devoted mentor and ambassador for the liberal arts college who helped recruit student athletes and with his wife, Susan, hosted international students upon their introduction to Wellesley” (Wall Street Journal). They “hosted 37 international students during his time at Wellesley, offering them a home-away-from-home while they attended the college” (Boston Globe).

In a 2007 symposium to honor Case at Harvard University, Elena Ranguelova—a Bulgarian-born economist—“recalled one Christmas when she house sat for the Cases while they visited relatives in Ohio. Before they left, she mentioned to Case that she had a bad toothache. He made an appointment for her to see his family dentist. When she learned that she had to have four wisdom teeth pulled at a cost of $1,200, she asked the student aid society for a loan. But the society told her its funds were exhausted. Hearing this, Case told Ranguelova that he could arrange for the society to find the money. And, sure enough, the dental bill was paid. Some time later, Ranguelova was at a wine-tasting party at the Cases’ house. (Did I mention that he has a wine cellar with bottles more than a half century old?) (…)  Suddenly, he was telling a story of how he paid for my [Ranguelova’s] wisdom teeth. Until that moment, she had assumed that she still owed the aid society. Case had let the secret slip” (Metro West Magazine). Talk to Wellesley volleyball coach Dorothy Webb, who calls him “the best fan of athletics I can imagine for any college” (Metro West Magazine).

From flunking a class to receiving an invitation to give a keynote talk

In an interview with NPR (2011), Case is asked: “You’ve had a lot of kudos over the years. Is there anything that sort of stands out as the personally important moment for you?”  Case answers: “Last week, we had the 11th hour of the 11th day of the 11th month. I took my first graduate school exam at Harvard at the 11th hour of the 11th day of the 11th month in 1971. And it was taught by a guy named Ed Leamer. I basically flunked that first exam. And I got in the car with my wife and we decided to go look at prep schools because I wasn’t going to make it through economics. Ed Leamer called me up about five years ago. He’s now a dean out at UCLA. And he invited me to come out and give a keynote talk at a conference he was running. And I said, Ed, this is terrific. You flunked me in my first graduate school exam. He, of course, didn’t remember.”