1. www.bea.gov The Importance of Accurate & Integrated Measures of Property Prices J. Steven Landefeld, Director February 23 rd, 2010 41 st Session of the UN Statistical Commission

2. www.bea.gov Importance of Property Prices ▪ Housing and other asset bubbles significant part of U.S. macro story.  Rising housing prices and their affect on net worth, debt accumulation, consumer spending and saving.  Rising housing prices and their affect on residential investment  Effects of falling prices:  Reductions in consumer spending and investment in residential structures  Increased saving and rebuilding of balance sheets  Multiplier affects

3. www.bea.gov Revaluations as a % of total household real estate assets

4. www.bea.gov Importance of Property Prices ▪ An IMF study of housing price booms and busts in 14 industrial countries, 1970-2001 (Helbling, 2005) found that:  “Housing price busts coincided with sharp slowdowns in economic activity, and in all but one case, with outright recessions.”  “Downturns in economic activity tend to be more severe in the case of boom-bust cycles.” ▪ For international housing price trends, see www.economist.com/houseprices

5. www.bea.gov Savings & Wealth

6. www.bea.gov Personal Income & Housing

7. www.bea.gov Home price indices (percent chg)

8. www.bea.gov Contributions to Percent Change in Real GDP

9. www.bea.gov What Prices? ▪ Asset Prices  Stock: Variety of housing prices from sales, assessments, and survey data  Investment flow for structures: Replacement cost using mix of hedonic and other measures ▪ Rental Price:  Gross rent: Rental and benchmark housing survey data  Maintenance and other costs: Variety of data  Net rent: residual

10. www.bea.gov Why It’s Important to Get It Right ▪ Asset prices affect consumer confidence, saving, consumer spending, and availability of credit. ▪ Rental prices affect inflation and COLA’s, equity prices, bond prices and interest rates, exchange rates, Fed policy, and real output and employment. ▪ Investment prices affect industry and national real GDP and productivity, inflation, Fed Policy, and real output and employment.

11. www.bea.gov Home price indices [Dec 2000 = 1.0]

12. www.bea.gov Use of Moving Averages ?

13. www.bea.gov Potential Problems ▪ Use of marginal prices in valuing stocks  Markets can be very thin and volatile  Market transactions in the downturn may be overly weighted to distress sales and sales from distressed areas  Example from the United States ▪ Important issue in relation to the discussion of marking assets to market

14. www.bea.gov Potential Problems ▪ Owner’s equivalent rent (OER):  Adequacy of respondent estimates of rental values  Adequacy of rents from rental units as a proxy for implicit owner occupied housing rents  Ambiguity of relationship between user cost and OER estimates

15. www.bea.gov Conclusions ▪ Importance of accurate, timely, and relevant data on property prices call for:  Indicators of sustainability in trends in property prices  Property price to personal and business income ratios. detailed leverage ratios, bank exposure, debt service, and integrated financial and real accounts.  More complete data on housing transactions, including characteristics and prices.  New hedonic indexes for commercial and residential asset prices  Use of a moving averages?  More accurate data on owners equivalent rent (OER):  More complete and timely benchmark data on rental values and characteristics  Mix of user cost and OER methods?