Revisions in Repeat‐Sales Price Indexes: Here Today, Gone Tomorrow?

Abstract

Price indexes based on the repeat-sales model are revised all the way to the beginning of the sample every time a new quarter of information becomes available. Revisions can adversely affect practitioners. In this paper we examine this revision process both theoretically and empirically. The theory behind the repeat-sales method says that revisions should lower the standard error of the estimated indexes; we prove that, in fact, the revised index is more efficient than the original one. This implies that large samples should make revisions trivial. However, our data, and the Freddie-Fannie data, suggest that revisions are large, insensitive to sample size and systematic; revisions are more likely to be downward than upward. In Los Angeles and Fairfax, revisions are usually downward and statistically significant. This bias in initial repeat-sales estimates is caused by sample selectivity; properties with only one or two years between sales do not appreciate at the same rate as other properties. We hypothesize that these "flips" are improved (possibly cosmetically) between sales. One implication of our analysis is that flips should be removed or downweighted before calculating repeat-sales indexes. The same model estimated without flips appears free of bias. We find small increases in efficiency from adding up to 4,300 observations to a base of 1,200. Copyright American Real Estate and Urban Economics Association.

Repeat Sales Index for Thin Markets

“…These results are in accord with the findings of, for example, Shiller (1993) and Clapp and Giaccotto (1999). We conclude that a feasible alternative is to keep all sales in the dataset and explicitly model them, rather than delete all within-short-period repeat sales and, therefore, ignore information in the data.…”

“…He presents evidence that in the presence of heterogeneity across space γ 0 is too large and the slope of the index too small. The same type of reasoning is followed by Clapp and Giaccotto (1999), therefore they exclude all sales within one or two years.…”

“…This means that even for particular time periods where no observations are available, an estimate of the price level can be provided. The use of a structural time series model results in a more stable price index and (partly) reduces systematic downward revisions found in the repeat sales indices, see for example Clapp and Giaccotto (1999) and Clapham et al (2006). Another advantage of these models is that price indices are provided even in continuous time models, avoiding the problem of temporal aggregation, for an example see Englund et al (1999).…”

Developing a House Price Index for The Netherlands: A Practical Application of Weighted Repeat Sales

“…In a period of rapidly rising house prices, as observed between 1998 and 2001 in The Netherlands, a number of sales will have taken place purely for speculative reasons. Clapp and Giacotto (1999) advise that transactions, which they refer to as 'flips', be removed or weighed down. Flips are houses that are resold within 1 or 2 years of purchase.…”

“…This is termed revision volatility and it may induce problems to the interpretability of the index, as the new index values may not be similar to the old ones. Clapp and Giacotto (1999) showed that revisions may be large, insensitive to sample size, and systematically downwardly directed. Clapp and Giacotto (1999) observed that properties with only 1 or 2 years between sales (so-called 'flips') appreciate at a higher rate than other properties and may therefore be partly responsible for the downward revision of the index.…”