House Prices and Consumer Welfare

21 Pages Posted: 22 Jun 2003 Last revised: 27 Mar 2022

See all articles by Patrick Bajari

Patrick Bajari

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

C. Lanier Benkard

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

John Krainer

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: June 2003

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.

Suggested Citation

Bajari, Patrick and Benkard, C. Lanier and Krainer, John, House Prices and Consumer Welfare (June 2003). NBER Working Paper No. w9783, Available at SSRN: https://ssrn.com/abstract=418285

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C. Lanier Benkard

Stanford Graduate School of Business ( email )

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John Krainer

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