Panel Discussion on Panel Discussion on Housing PricesHousing Prices

Robert J. GordonRobert J. GordonNorthwestern University and CEPRNorthwestern University and CEPR

Conference on Prices, Productivity and GrowthConference on Prices, Productivity and GrowthMadrid, October 17, 2003Madrid, October 17, 2003

Housing Prices: Basic PhilosophyHousing Prices: Basic Philosophy

U. S. CPI was distorted pre-1983U. S. CPI was distorted pre-1983 Most serious bias was housingMost serious bias was housing Crazy measure, we can forget the detailsCrazy measure, we can forget the details But it started a discussionBut it started a discussion Fixed by CPI-RS and CPI-U-X1Fixed by CPI-RS and CPI-U-X1

Why we don’t want a user cost measure for Why we don’t want a user cost measure for owner-occupied housingowner-occupied housing Excess sensitivity to interest rates, owner-occupiers are Excess sensitivity to interest rates, owner-occupiers are

paying a long-term costpaying a long-term cost Insuperable problem of dealing with capital gains, not Insuperable problem of dealing with capital gains, not

part of GDP and should not be in price indexespart of GDP and should not be in price indexes People my age? Our wealth is partly housing, it People my age? Our wealth is partly housing, it

has been cost-free for decadeshas been cost-free for decades

But we have to put SOMETHING But we have to put SOMETHING into the CPI and GDP deflatorinto the CPI and GDP deflator

Why it is sensible to use a shelter rent Why it is sensible to use a shelter rent index as a proxy for owner-occupied index as a proxy for owner-occupied housing (in CPI and GDP deflator)housing (in CPI and GDP deflator) Rent is the outcome of a market processRent is the outcome of a market process Landlord is affected by everything that Landlord is affected by everything that

impacts owner-occupiers, starting with impacts owner-occupiers, starting with supply and demandsupply and demand

Capital gainsCapital gains Property taxesProperty taxes Maintenance expensesMaintenance expenses

Thinking about Rent Deflation, back Thinking about Rent Deflation, back to the Boskin Commissionto the Boskin Commission

The Boskin Commission found The Boskin Commission found upward CPI bias under every lamp upward CPI bias under every lamp postpost

Rental shelter is the single largest Rental shelter is the single largest component of the CPIcomponent of the CPI

We now understand why the historic We now understand why the historic bias in the U. S. CPI for rental shelter bias in the U. S. CPI for rental shelter must have been DOWNWARDS not must have been DOWNWARDS not UPWARDSUPWARDS

Why Upward CPI Bias Can’t be Why Upward CPI Bias Can’t be Extrapolated Back ForeverExtrapolated Back Forever

Hulten as discussant of Nordhaus Hulten as discussant of Nordhaus (1997)(1997)

1.4 percent upward bias forever?1.4 percent upward bias forever? 1.3 lbs of potatoes per day in 1800, 1.3 lbs of potatoes per day in 1800,

nothing elsenothing else 0.8 ounces of potatoes per day in 1569, 0.8 ounces of potatoes per day in 1569,

compare to those Bruegel paintingscompare to those Bruegel paintings Solution? Consumer durables always Solution? Consumer durables always

upward bias, but other parts of CPI upward bias, but other parts of CPI perhaps downward bias. perhaps downward bias.

Circumstantial EvidenceCircumstantial Evidence

1999/1925 CPI for Shelter: 5.11999/1925 CPI for Shelter: 5.1 Nominal contract rent: 19.6Nominal contract rent: 19.6 Selling price existing single-family Selling price existing single-family

houses in Washington DC: 22.5houses in Washington DC: 22.5 Nominal net residential capital stock: Nominal net residential capital stock:

22.122.1 Sheer amazement factor: My father sold Sheer amazement factor: My father sold

a house in Berkeley CA in 1941 for $6K, a house in Berkeley CA in 1941 for $6K, bought another in 1945 for $14K (kicked bought another in 1945 for $14K (kicked himself). Now worth at least $1 million.himself). Now worth at least $1 million.

CPI Shelter? What a Great Topic!CPI Shelter? What a Great Topic!

Not just the circumstantial evidence, Not just the circumstantial evidence, but:but:

By far the largest weight in the CPIBy far the largest weight in the CPI Less quality heterogeneity in rental Less quality heterogeneity in rental

units than owner-occupied unitsunits than owner-occupied units Less of a “glamour city” effect in rents Less of a “glamour city” effect in rents

than in selling prices of housesthan in selling prices of houses Conceptually simpler. A rent is a rent. Conceptually simpler. A rent is a rent.

No need to consider issues of tax-No need to consider issues of tax-deductability or capital gains.deductability or capital gains.

My New Paper on a Century of My New Paper on a Century of Shelter Rental PricesShelter Rental Prices

Long historical horizon back to 1914Long historical horizon back to 1914 Uses AHS data 1975-2001Uses AHS data 1975-2001 New regressions for Census New regressions for Census

microdata 1960-90 (750,000 microdata 1960-90 (750,000 observations!)observations!)

Interpretation of Weston 1930-70Interpretation of Weston 1930-70 Three new pieces of evidence pre-Three new pieces of evidence pre-

19301930

CPI vs. AlternativesCPI vs. Alternatives

Differences CPI minus alternative Differences CPI minus alternative growth rates equal or exceed 2.0 growth rates equal or exceed 2.0 percent per year for all time periods percent per year for all time periods including 1930-85.including 1930-85. Corresponds to “circumstantial Corresponds to “circumstantial

evidence”. 1999/1925 of 22 vs. 5 evidence”. 1999/1925 of 22 vs. 5 translates to 2.0 percent per year.translates to 2.0 percent per year.

Could quality have increased at 2.0% Could quality have increased at 2.0% per year?per year?

Good Reasons to Believe the CPI Good Reasons to Believe the CPI was Downward Biased before 1988was Downward Biased before 1988 Aging BiasAging Bias

Randolph (1988)Randolph (1988) Fixed by BLSFixed by BLS

Non-response biasNon-response bias Analyzed by Crone-NakamuraAnalyzed by Crone-Nakamura Their bias number is 1.4-1.6 percent for Their bias number is 1.4-1.6 percent for

1942-87.1942-87. Leaves very little room for quality Leaves very little room for quality

changechange

Paper Goes Backward in Time, Paper Goes Backward in Time, Starting with the 1975-2001 AHS Starting with the 1975-2001 AHS

Variables groupedVariables grouped QuantitativeQuantitative Region and UrbanRegion and Urban Positive QualityPositive Quality Negative Quality and EnvironmentNegative Quality and Environment Public Housing and subsidiesPublic Housing and subsidies

In this sample hedonic ≠ qualityIn this sample hedonic ≠ quality

Gasping at the Richness of the Gasping at the Richness of the DataData

Macro time-series economistMacro time-series economist First paper, 1970, 64 quarters of dataFirst paper, 1970, 64 quarters of data Most recent paper, 2003, 195 quarters of Most recent paper, 2003, 195 quarters of

datadata Here we are with 40,000 to 55,000 Here we are with 40,000 to 55,000

observations in a single regressionobservations in a single regression Not to mention our Census results Not to mention our Census results

with 750,000 observationswith 750,000 observations But data problems are a bucking But data problems are a bucking

bronco that must be tamed bronco that must be tamed

AHS Regression Results, 1975-AHS Regression Results, 1975-20012001

Double log specificationDouble log specification All Variables Significant at <1 percentAll Variables Significant at <1 percent Cumulative price increase Cumulative price increase

1975-2001 difference 1.23 percent per 1975-2001 difference 1.23 percent per year. year.

1975-87 difference 1.39 percent per year1975-87 difference 1.39 percent per year 1987-2001 difference 1.10 percent per year1987-2001 difference 1.10 percent per year

Surprising in light of general belief that Surprising in light of general belief that CPI downward bias has been fixedCPI downward bias has been fixed

Now It Gets Tougher, Now It Gets Tougher, Guesstimates about Pre-1970 Guesstimates about Pre-1970

Quality ChangeQuality Change Four big improvements in qualityFour big improvements in quality

Plumbing, in WestonPlumbing, in Weston Central Heating, no more hauling of coal Central Heating, no more hauling of coal

to room heatersto room heaters ElectrificationElectrification Household Appliances. By 1973, Household Appliances. By 1973,

refrigerator and stove were standardrefrigerator and stove were standard Post-1960 central air conditioning and built-Post-1960 central air conditioning and built-

in dishwashersin dishwashers

Extracting Data from Clair Brown’s Extracting Data from Clair Brown’s Amazing Book (1994)Amazing Book (1994)

Initial SurprisesInitial Surprises Decline in rooms from 5.3 in 1918 to 3.9 in 1960 Decline in rooms from 5.3 in 1918 to 3.9 in 1960

(Census)(Census) More than half (~55%) of renters lived in houses More than half (~55%) of renters lived in houses

in 1918!in 1918! Far from our image of dark, dank tenementsFar from our image of dark, dank tenements The Rhapsody of Flight: Thinking of Chicago’s The Rhapsody of Flight: Thinking of Chicago’s

bungalow beltbungalow belt Flying over, narrow lots but windows on all sides, Flying over, narrow lots but windows on all sides,

garages, alleys, parkways, trees, telephone poles in garages, alleys, parkways, trees, telephone poles in backback

Other Cities? Boston’s Triple-DeckersOther Cities? Boston’s Triple-Deckers

Offsetting shift from houses to Offsetting shift from houses to apartments and fewer rooms:apartments and fewer rooms:

1918 characteristics1918 characteristics Only half of urban dwellings were Only half of urban dwellings were

electrifiedelectrified Central heating virtually nil.Central heating virtually nil.

In rented units, only half of rooms heated at allIn rented units, only half of rooms heated at all Coal stoves – dust, dirt, inconvenienceCoal stoves – dust, dirt, inconvenience

Bathrooms = about 2/3Bathrooms = about 2/3 Refrigerators didn’t existRefrigerators didn’t exist

Qualilty observations biased upQualilty observations biased up Farm, blacksFarm, blacks

Our Wild Speculations about the Our Wild Speculations about the Value of Quality ChangeValue of Quality Change

Plumbing diffusion must have added Plumbing diffusion must have added about 0.75% pa during 1918-30about 0.75% pa during 1918-30

Central heating? Start from post-Central heating? Start from post-1975 AC coefficient. Probably added 1975 AC coefficient. Probably added 0.4% pa 1918-730.4% pa 1918-73

Another 0.4% pa 1918 to 1950 for Another 0.4% pa 1918 to 1950 for electricityelectricity

Overall, 1.0% quality per year seems Overall, 1.0% quality per year seems conservative, probably more 1918-30conservative, probably more 1918-30

A Brief Visit to Our Home TownA Brief Visit to Our Home Town

Apartment Rent Index, 1925-99Apartment Rent Index, 1925-99 Look at How Many Variables are ControlledLook at How Many Variables are Controlled

RegionRegion Urban vs. RuralUrban vs. Rural Location within Metro AreaLocation within Metro Area

Quality: number of rooms, bathrooms, Quality: number of rooms, bathrooms, heat (type, whether incl in rent), AC, heat (type, whether incl in rent), AC, parkingparking

Age? Buildings get older but they are Age? Buildings get older but they are maintained and improved, esp. kitchensmaintained and improved, esp. kitchens

Evanston ResultsEvanston Results

CPI Strange 1925-50, -2.05%CPI Strange 1925-50, -2.05% Plausible Difference 1950-75, -0.94%Plausible Difference 1950-75, -0.94%

Compatible with other results, quality Compatible with other results, quality and CPI bias split the 2% difference, 1% and CPI bias split the 2% difference, 1% vs. 1%vs. 1%

1975-99 difference down to -0.67%1975-99 difference down to -0.67% Remaining Research:Remaining Research:

How to tell whether Evanston is typical How to tell whether Evanston is typical or unusual?or unusual?

ConclusionsConclusions

CPI for shelter grew roughly 2% pa CPI for shelter grew roughly 2% pa less than mean contract rent, 1930-87less than mean contract rent, 1930-87

Wide variety of information suggests Wide variety of information suggests quality change over this period = 1% quality change over this period = 1% papa AHS regressions, esp. controlling for ageAHS regressions, esp. controlling for age Census regressions for 1960-70Census regressions for 1960-70 Interpreting CES expenditure data as Interpreting CES expenditure data as

compiled by Browncompiled by Brown Evanston rent indexEvanston rent index

Bottom LineBottom Line

Downward bias in CPI for shelter of Downward bias in CPI for shelter of roughly 1% 1930-85, less before 1930 and roughly 1% 1930-85, less before 1930 and after 1985after 1985

Pending results on apparel, food, and Pending results on apparel, food, and consumer durables, implication of possible consumer durables, implication of possible upward bias in NIPA measures of economic upward bias in NIPA measures of economic growth, 1930-85growth, 1930-85

Will this project decapitate the “big wave” Will this project decapitate the “big wave” of productivity growth, 1913-72? Stay of productivity growth, 1913-72? Stay tuned, to be continued. . . . tuned, to be continued. . . .