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House Prices and Consumer Welfare

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Author Info
Patrick Bajari
C. Lanier Benkard
John Krainer

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Abstract

We develop a new approach to measuring changes in consumer welfare due to changes in the price of owner-occupied housing. In our approach, an agent's welfare adjustment is defined as the transfer required to keep expected discounted utility constant given a change in current home prices. We demonstrate that, up to a first-order approximation, there is no aggregate change in welfare due to price increases in the existing housing stock. This follows from a simple market clearing condition where capital gains experienced by sellers are exactly offset by welfare losses to buyers. Welfare losses can occur, however, from price increases in new construction and renovations. We show that this result holds (approximately) even in a model that accounts for changes in consumption and investment plans prompted by current price changes. We estimate the welfare cost of house price appreciation to be an average of $127 per household per year over the 1984-1998 period.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9783.

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Date of creation: Jun 2003
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Handle: RePEc:nbr:nberwo:9783

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
D6 - Microeconomics - - Welfare Economics

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  1. Kearl, J R, 1979. "Inflation, Mortgages, and Housing," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 1115-38, October. [Downloadable!] (restricted)
  2. Poterba, James M, 1984. "Tax Subsidies to Owner-occupied Housing: An Asset-Market Approach," The Quarterly Journal of Economics, MIT Press, vol. 99(4), pages 729-52, November. [Downloadable!] (restricted)
    Other versions:
  3. Blackley, Dixie M. & Follain, James R., 1996. "In search of empirical evidence that links rent and user cost," Regional Science and Urban Economics, Elsevier, vol. 26(3-4), pages 409-431, June. [Downloadable!] (restricted)
  4. Glenn Canner & Karen Dynan & Wayne Passmore, 2002. "Mortgage refinancing in 2001 and early 2002," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Dec, pages 469-481. [Downloadable!]
  5. Edward L. Glaeser & Jesse M. Shapiro, 2002. "The Benefits of the Home Mortgage Interest Deduction," NBER Working Papers 9284, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. DiPasquale, Denise & Wheaton, William C., 1992. "The cost of capital, tax reform, and the future of the rental housing market," Journal of Urban Economics, Elsevier, vol. 31(3), pages 337-359, May. [Downloadable!] (restricted)
  7. Karl E. Case, John M. Quigley, Robert J. Shiller., 2001. "Comparing Wealth Effects: The Stock Market versus The Housing Market," Economics Working Papers E01-308, University of California at Berkeley. [Downloadable!]
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  8. Hilary W. Hoynes & Daniel L. McFadden, 1996. "The Impact of Demographics on Housing and Nonhousing Wealth in the United States," NBER Chapters, in: The Economic Effects of Aging in the United States and Japan, pages 153-194 National Bureau of Economic Research, Inc. [Downloadable!]
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  9. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May. [Downloadable!] (restricted)
  10. Dougherty, Ann & Van Order, Robert, 1982. "Inflation, Housing Costs, and the Consumer Price Index," American Economic Review, American Economic Association, vol. 72(1), pages 154-64, March. [Downloadable!] (restricted)
  11. DiPasquale Denise & Wheaton William C., 1994. "Housing Market Dynamics and the Future of Housing Prices," Journal of Urban Economics, Elsevier, vol. 35(1), pages 1-27, January. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ricardo M. Sousa, 2009. "Wealth Effetcs on Consumption: Evidence from the euro area," NIPE Working Papers 12/2009, NIPE - Universidade do Minho. [Downloadable!]
    Other versions:
  2. Tuomas A. Peltonen & Ricardo M. Sousa & Isabel S. Vansteenkiste, 2009. "Wealth Effects in Emerging Market Economies," NIPE Working Papers 4/2009, NIPE - Universidade do Minho. [Downloadable!]
    Other versions:
  3. Antonia Diaz & Maria Jose Luengo Prado, 2008. "On the User Cost and Homeownership," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(3), pages 584-613, July. [Downloadable!] (restricted)
    Other versions:
  4. Jan Rouwendal, 2009. "Housing Wealth and Household Portfolios in an Ageing Society," De Economist, Springer, vol. 157(1), pages 1-48, March. [Downloadable!] (restricted)
  5. Michael Boskin, 2005. "Causes and Consequences of Bias in the Consumer Price Index as a Measure of the Cost of Living," Atlantic Economic Journal, International Atlantic Economic Society, vol. 33(1), pages 1-13, March. [Downloadable!] (restricted)
  6. Robert J. Gordon & Todd vanGoethem, 2005. "A Century of Housing Shelter Prices: Is There a Downward Bias in the CPI?," NBER Working Papers 11776, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Wenli Li & Rui Yao, 2005. "The life-cycle effects of house price changes," Working Papers 05-7, Federal Reserve Bank of Philadelphia. [Downloadable!]
  8. Todd Sinai & Nicholas S. Souleles, 2005. "Owner-occupied housing as a hedge against rent risk," Working Papers 05-10, Federal Reserve Bank of Philadelphia. [Downloadable!]
    Other versions:
  9. Reis, Ricardo, 2005. "A cost-of-living dynamic price index, with an application to indexing retirement accounts," CEPR Discussion Papers 5394, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  10. Davis, Morris & Heathcote, Jonathan, 2005. "The Price and Quantity of Residential Land in the United States," CEPR Discussion Papers 5333, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  11. W. Erwin Diewert & Alice O. Nakamura, 2009. "Accounting for housing in a CPI," Working Papers 09-4, Federal Reserve Bank of Philadelphia. [Downloadable!]
    Other versions:
  12. Nikola Dvornak & Marion Kohler, 2003. "Housing Wealth, Stock Market Wealth and Consumption: A Panel Analysis for Australia," RBA Research Discussion Papers rdp2003-07, Reserve Bank of Australia. [Downloadable!]
    Other versions:
  13. Ricardo Reis, 2005. "A Dynamic Measure of Inflation," NBER Working Papers 11746, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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