Property Renovations and Their Impact on House Price Index Construction

Abstract

This paper provides the first wide-scale report of property renovation bias in repeat-sales house price indices across a multitude of U.S. geographies. In local markets, omitting information on property improvements can bias index estimates in a predictable manner and can distort valuations by as much as 15% in the central districts of large cities. This systematic variation in bias is partially a function of the disparate concentration of renovation activity with property improvements occurring more frequently in denser areas. The distortionary effect tends to decline outside of downtown areas and becomes negligible in smaller cities.