A Guide to Aggregate House Price Measures

In recent years, the United States, like many other industrialized nations, has experienced wide swings in the growth rate of housing prices. Understanding these price changes is important for a number of reasons. Housing serves as a major source of individual wealth. Hence, changes in its value may influence consumer spending and saving decisions, in turn, affecting overall economic activity. More narrowly, changes in housing prices both impact and reflect the health of the residential investment sector, a major source of employment. Further, house prices are the key determinant of housing affordability, an important public policy goal in many countries. To understand the behavior of housing prices and their influence on the economy, it is crucial to have an accurate measure of aggregate housing prices. In practice, however, it is difficult to develop such a measure. Housing is an extremely heterogeneous good, and houses are sold only infrequently. Heterogeneity makes it difficult to distinguish between aggregate and individual price variations. The infrequency of sales implies that, in any time period, prices are not observed for most houses.