I produced the home price series shown in Figure 2.1 by first linking together various annual home price indexes (by multiplying each by a constant so that values in one overlapping year are equalized across indexes) to arrive at a nominal home price index. Next, the nominal home price index was deflated by the Consumer Price Index.
Even though there were no regularly published home price indexes before the 1960s, some economists were constructing indexes of home prices that cover most of the years since 1890. We found home price indexes from 1890 to 1934 and from 1953 to the present that used in their construction some device to attempt to hold the quality of the home constant.
The nominal home price index 1890-1934 is from Leo Grebler, David M. Blank, and Louis Winnick, Capital Formation in Residential Real Estate: Trends and Prospects (Princeton, N.J.: National Bureau of Economic Research and Princeton University Press, 1956). It is a repeated-measures index based on a survey of homeowners in twenty-two U.S. cities, who were asked to give the value of their home in 1934 and the date and price of the purchase of that home. Since it is based on repeated measures of individual homes, the series is protected, in contrast to the simple median price, from any bias from changes in the mix of houses sold or of the increasing size and quality of newer homes. Its shortcoming is that it depends on memories of the surveyed homeowners for the earlier purchase price.
The nominal home price index that we constructed for 1934-53 is a simple average over five cities of median home prices advertised in newspapers. The cities are Chicago, Los Angeles, New Orleans, New York, and Washington, D.C. My students collected the data from microfilmed newspapers at the Yale University library, collecting approximately thirty prices for each city and year, except that for the fifth city, Washington, D.C., 1934-48, data came from a median price series from E. M. Fisher, Urban Real Estate Markets: Characteristics and Financing (New York:National Bureau of Economic Research, 1951). The median series for 1934-53 does not make any attempt to correct for home quality change, as do the indexes we use for the other sub periods. Improvement in home size and quality gives median home price an upward bias, and this is why I avoided using median price outside the 1934-53 interval.
The nominal home price index for 1953-75 is the home purchase component of the US Consumer Price Index (CPI). The Bureau of Labor Statistics collected data on home prices for those years for homes that are held constant in age and square footage. In the 1980s they discontinued this index when they switched to a rental equivalence basis for housing in the CPI. They made this change to correct what was considered a conceptual flaw in the housing component of the CPI: the CPI is supposed to be a price of consumption goods and services, not of investment assets. For our purposes, however, the old home purchase component is acceptable. There are, however, some short comings in the home purchase component, notably that it is based only on homes with certain government-subsidized mortgages, and the procedure that the Bureau of Labor Statistics used to correct for changes in the ceiling on these mortgages was not optimal. See J. S. Greenlees, “An Empirical Evaluation of the CPI Home Purchase Index 1973—8,” American Real Estate and Urban Economics Association Journal, 1982. A more detailed discussion of the indexes that were used here for years before 1975 can be found in my paper “Consumption, Asset Markets and Macroeconomic Fluctuations,” Carnegie-Rochester Conference Series on Public Policy, 17 (1982): 203-38.
The nominal home price index for 1975—87 is the U.S. home price index published by the U.S. Office of Housing Enterprise Oversight (OFHEO), which is available on their Web site. It is a repeat sales index, and thus controls for quality change. The nominal home price index for 1987—2004 is the repeat-sales U.S. home price index produced by Fiserv CSW, Inc., successor to Case Shiller Weiss, Inc.
Since 1987, the CSW and the OFHEO series have shown very similar patterns through time, though the sharpness of the increase is slightly more pronounced in the CSW series, an observation we attribute to the fact that our series is based only on actual sales, while the OFHEO series also uses both actual sales and appraised values as if they were sales. Appraised values are somewhat sluggish to respond to new market conditions.
The consumer price index used to deflate nominal series to real is the same as that used in Figure 1.1 and elsewhere in this book.
