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Does the Case-Shiller Index suffer from distortion due to mix shift?

As mentioned in previous pages, the Case-Shiller index of homes sold is not as directly impacted by the mix in sales. Case-Shiller compares a given home's sales price to that same home's sales price in prior periods. So larger homes are always compared against larger homes, and smaller homes are always compared against smaller homes.

Case-Shiller is a fine index of home values, but it can also be distorted by changes in the sales mix IF the underlying home value trends vary by type of home. For example, if higher-end properties are holding their values but lower-end properties are declining rapidy, then Case-Shiller house-on-house comparisons will reflect these two trends. High-end home comparisons will show flat trends, but low-end home comparisons will show falling price trends. If the mix of homes sold shifts significantly towards either of those endpoints, the overall Case-Shiller index will be skewed up or down.

The concern regarding Case-Shiller is more theoretical then practical, at least for the publicly available indexes. Case-Shiller publishes data for 20 large metro markets each month, and each month's data is drawn from a three-month moving window. So the April 2011 Case-Shiller data is actually a collection of February 2011, March 2011, and April 2011 sales data. Case-Shiller also publishes their data by tier (high, median, and low) which serves to further minimize any distortion based on the shift in mix, when using the tiered indexes.

Next, what is a hedonic price index?