Quality-Adjusted House Price Indexes

Abstract

The constant-quality assumption in repeat-sales house price indexes (HPIs) introduces a significant time-varying attribute bias. The direction, magnitude, and source of the bias varies throughout the market cycle and across metropolitan statistical areas (MSAs). We mitigate the bias using a data-driven textual analysis approach that identifies and includes salient text from real estate agent remarks in the repeat-sales estimation. Absent the text, MSA-level HPIs are biased downward by as much as 7 percent during the financial crisis and upward by as much as 20 percent after the crisis. The geographic concentration of the bias magnifies its effect on local HPIs. (JEL C43, E31, R11, R31)

Documenting Loss Aversion using Evidence of Round Number Bias

“…At the same time, we provide evidence that the application of the standard empirical approach when applied to broad samples of housing transactions may overstate the extent of loss aversion due to a correlation between the types of houses and sellers on the market and the business or housing market cycle. Our findings are consistent with the evidence of compositional changes in the housing market over the business cycle, as documented by Nowak and Smith (2020) and Shen and Ross (2020). Our paper is also related to the focal point bias literature providing additional evidence that behavioral phenomenon like focal point bias and loss aversion are likely to be found together (e.g., Fraser et al, 2015) and that individuals who exhibit psychological biases are different on average from those who do not (Backus et al, 2019;Chava and Yao, 2017).…”

“…Bracke and Tenreyro (In Press) also find more modest estimates of 0.25 for residential housing in England and Wales, but their sample is restricted to cash-only sales, again possibly leading to a substantially more homogeneous sample of borrowers. Zhou et al (2020) also document a potential upward bias in estimates of the effect of loss aversion on sales prices based on bias in the composition of repeat sales transactions due to unobserved quality (Nowak and Smith, 2020;Shen and Ross, 2020).…”

COVID‐19 and housing market effects: Evidence from U.S. shutdown orders

“…Upon completing a transaction, the real estate agent updates the listing with the final purchase price, close of escrow date, and other details about the transaction. MLS data are representative of the residential market since the vast majority of sellers of single-family and condominium properties transact using a realtor (Lopez, 2021;National Association of Realtors, 2016;Nowak & Smith, 2020). We complement the transaction-level data with information on county-and state-level shutdown orders from multiple sources.…”

School quality as a catalyst for bidding wars and new housing development

“…Including house fixed effects in Equation () controls for unobserved time‐invariant house and neighborhood attributes. Including the sufficient dictionary of tokens in Equation () controls for time‐varying house and neighborhood attributes ($$\alpha _{int}$$) that are “unobserved” in previous studies (Nowak & Smith, 2020). When employed in unison, our approach allows us to isolate the causal effect of school quality on several measures of housing demand: bidding wars, transaction prices, and time‐on‐market.…”