Housing Depreciation and Aging Bias in the Consumer Price Index

Abstract

Abstract I use hedonic regression methods to estimate average rental housing physical depreciation for areas of the United States. I estimate downward quality bias of the U.S. consumer price index (CPI) caused by rental-housing physical depreciation, and I develop methods to correct the CPI for such aging bias. My physical depreciation estimates imply that recent percentage changes in the U.S. CPI shelter-cost indexes are downward biased by .3 to .4 annually. Such bias is nonnegligible because recent annual changes in the CPI shelter-cost indexes have ranged between 3.5% and 6.8% for various regions. My results also imply that rent-controlled housing has depreciated faster than other rental housing. KEY WORDS: Random coefficientsVariance componentsHedonic regressionsPrice indexesRent control