Square Feet Matter: Price Appreciation of Single Family Houses 1970-2000

Abstract

A conventional “average price” index measuring appreciation for single family houses in the U.S. from 1970 to 2000 reports nominal appreciation of 6.2 percent annually, and real appreciation of 1.3 percent. An “average price” index is systematically biased, however, due to the annual addition of new, larger, expensive houses to the housing stock, and the removal of old, smaller, less expensive houses. This paper proposes a method to avoid this bias by measuring price per square foot of house instead of price per house. The conclusion is that the price appreciation on a square foot basis is very low, in the range of a quarter of a percent per annum. While many homeowners see a rising value of their home as an important source of real wealth accumulation, it is unlikely that this happened to any substantial degree in the U.S. over the period examined.