Depreciation, Maintenance, and Housing Prices

Abstract

This paper investigates the effect of homeowner maintenance and improvements on the depreciation rate for housing and on house price indexes. We examine three specifications of a hedonic house price model: one that includes a variable for age, as a proxy for depreciation, and an age–maintenance interaction variable; one that considers depreciation but ignores maintenance; and one that ignores both depreciation and maintenance. The remarks of the listing agent as to the property's condition is our proxy for the level of maintenance characterizing the home. In our sample, we find that poorly maintained homes depreciate at a much faster rate than do homes with average maintenance, and that well-maintained homes depreciate somewhat more slowly. Omitting maintenance from the variable specification has little impact on hedonic house price indexes constructed with our data, but failing to consider dwelling age imparts a significant and growing downward bias to the indexes. Monte Carlo simulations investigating various data specifications support our empirical findings.