Estimating housing rent depreciation for inflation adjustments

Luis A. Lopez, Jiro Yoshida

Research output: Contribution to journalArticlepeer-review

Abstract

U.S. inflation measures, such as the Consumer Price Index, are adjusted for an aging-bias based on estimates of the average rent depreciation. This study analyzes the characteristics of rent depreciation using novel, market-based data on rental contracts in Las Vegas, NV. We find that the estimated annual depreciation rate for new properties is 0.9% for single-family residences and 1.5% for condominiums. The higher depreciation rate for condominiums is due to higher functional obsolescence instead of physical deterioration. Rent depreciation rates are lower for older and smaller structures and vary significantly across neighborhoods. Our results suggest that local inflation rates are biased downward where new and large units increased since the last update to the official rent depreciation estimates but upward where the housing stock became older. From an asset pricing perspective, failing to account for initially high depreciation results in an overvaluation of new properties and an undervaluation of old properties.

Original languageEnglish (US)
Article number103733
JournalRegional Science and Urban Economics
DOIs
StateAccepted/In press - 2021

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics
  • Urban Studies

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