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At the panel discussion the other night, the methodology of the Case-Shiller Index was questioned.

Do they include every repeat sale they find, or just the recent ones?

Because the long-time owners, ones who paid $33,000 in the 1960s, and are now selling for $700,000, could really skew the index.  Thankfully, the folks at CSI have published their methodology:

http://www2.standardandpoors.com/spf/pdf/index/SP_CS_Home_Price_Indices_Methodology_Web.pdf

They exclude properties that were resold within six months, though the REOs being held longer than 6 months are going to be included.  The “purchase price” recorded by the banks at the trustee sale, in almost all cases, will be quite a bit higher than the final sales price – their purchase price was based on appraisals almost a year prior to the eventaul REO sale.

The CSI also excludes those sales which they can’t find a previous purchase price, which will eliminate many of the long-time owners, and they also exclude new homes that were resold too.

The CSI also assigns ‘weights’ based on time between sales, but they said that 85% to 90% are unweighted.  If they are downweighting the older ‘sales pairs’, there has to be some extra emphasis in the index on the more recent pairs. 

Wouldn’t that make the index somewhat biased to the negative?

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