Study: Avg US Household Lost $127/Yr To Home Price Rises

386 words
2 July 2003
11:31 am GMT
Dow Jones Capital Markets Report
English
(Copyright (c) 2003, Dow Jones & Company, Inc.)

   By Rebecca Christie

   Of DOW JONES NEWSWIRES

WASHINGTON -(Dow Jones)- The average U.S. household lost $127 per year because of rising home prices in the 1980s and 1990s, according to a new study by economists from Stanford University and the San Francisco Federal Reserve.

"Over the period 1984-1998, we find that U.S. households were made worse off by an average of $127 per year," said the paper, released recently by the National Bureau of Economic Research.

The study finds that appreciation of existing homes didn't have an overall impact on consumer welfare, because sellers benefit at the expense of buyers. But rising costs of construction and renovation had a negative overall impact.

"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," said the study, a collaboration among Fed economist John Krainer and Stanford economists Patrick Bajari and C. Lanier Benkard.

The authors said their study provides a fresh look at how rising home prices affect consumer well-being. The housing market has been a mainstay of the U.S. economy during the slump of the last few years, and consumers continue to take advantage of low interest rates to refinance their mortgages and improve their personal finances.

Housing costs make up about a third of the consumer price index, making homeownership the biggest debt and biggest investment that many consumers will take on. At the national level, home prices have risen by an average of 7% each year since 1995, the study said.

"The sheer size of housing in the average household's consumption bundle makes it imperative to understand the effects of changing prices on consumer welfare," the study said.

The study cautions that even though U.S. homeowners as a group haven't seen much effect from rising home prices, individuals may have experienced much bigger swings.

"Housing inflation involves a redistribution of income between those buying homes and those selling their homes," 

the study said. "While there is no aggregate change in welfare, there are potential large individual losses and gains."

   -By Rebecca Christie, Dow Jones Newswires; 202 862 9249;

rebecca.christie@dowjones.com