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A Companion to Urban Economics - Arnott and McMillen - Chapter 14

C H A P T E R FOURTEEN Housing Price Indexes 14.1 INTRODUCTION: WHY ARE ACCURATE HOUSING PRICE INDEXES IMPORTANT? The value of owner-occupied housing accounts for upwards of one-third of total household net wealth in the United States. | A Companion to Urban Economics Edited by Richard J. Arnott Daniel P. McMillen Copyright 2006 by Blackwell Publishing Ltd CHAPTER FOURTEEN Housing Price Indexes Bradford Case 14.1 Introduction Why are Accurate Housing Price Indexes Important The value of owner-occupied housing accounts for upwards of one-third of total household net wealth in the United States. The most recent economic recession appears to have been moderated by growth in house prices which supported consumer spending conversely the recession of the early 1990s may have been exacerbated by real declines in house prices. Single-family mortgages account for around one-fifth of the total assets held by US financial institutions. Losses on mortgages are typically quite small but the possibility that sharp declines in house prices could cause mortgage losses to surge prompts banks to develop sophisticated risk management models in which house price fluctuations play a leading role. For most individuals the value of a residence represents their greatest asset. Not only are consumption decisions based in part on housing wealth job changes retirement timing savings portfolio allocation home purchase and even household formation decisions may be affected by movements in housing values. For lower-income households governments at the federal state and local levels offer housing assistance such as Section 8 vouchers direct rent subsidies or home purchase subsidies. Government officials designing and administering such programs need accurate information not only on the price of owner-occupied properties but also on prices paid in the rental market. In short a huge number of decisions at all levels stand to be improved by a greater understanding of the path of housing prices and rents. In this chapter we introduce house price indexes by focusing on a foundation - the hedonic price model - that is quite straightforward. We also describe extensions from the hedonic techniques that are more sophisticated but still .