Academic journal article Urban Studies Research

Testing Estimates of Housing Cost Differences among US Metropolitan Areas

Academic journal article Urban Studies Research

Testing Estimates of Housing Cost Differences among US Metropolitan Areas

Article excerpt

1. Introduction

Researchers would like to investigate real earnings differences among urban areas in the US, but there is no good, official measure of living cost differences among places (1). For example, the Consumer Price Index (CPI) measures changes in costs over time in a place, not differences in costs among places. Researchers have responded to this problem with a variety of strategies. The most frequent of these is to use the ACCRA Cost of Living Index, an index compiled by a nonprofit organization. The suitability of this response is uncertain. While the ACCRA Index is available for a large set of metropolitan areas, data to calculate it are collected by volunteers and its accuracy has seldom been compared to practical alternatives.

This research contributes to a solution to this problem, in two ways. First, it evaluates alternative measures of housing cost differences among US metropolitan areas. (2) That evaluation is central to deciding how to best measure living costs, because the cost of housing is, by far, the largest source of variation in living costs among metropolitan areas. (3) Second, because the housing cost portion of the ACCRA Index is one of the measures it evaluates, this research offers evidence regarding the wisdom of using the full ACCRA Index as a measure of living cost differences.

This study evaluates six housing cost measures against two benchmarks. Initially, I test the ability of changes in each of the measures to predict changes in the shelter portion of the metropolitan CPI in 25 large metropolitan areas. Then, I test the ability of each measure to predict a proxy for a metropolitan area's housing costs: the average size of its dwellings. Using this proxy allows me to test performance of housing cost measures in 176 metropolitan areas.

This research builds on a prior paper by Easton, one which evaluated the same six measures of housing cost differences [1]. He tested them against a different benchmark: a housing cost index taken from work by Aten [2]. She created an experimental measure of living costs in 26 large metropolitan areas, using Bureau of Labor Statistics (BLS) data collected to calculate the CPI. By utilizing two new benchmarks and, in one test, a much larger set of metropolitan areas, this research provides additional evidence regarding the best way to measure housing cost differences among areas.

In addition to Easton's paper, two other articles provide some evaluation of metropolitan living cost measures. Koo et al. create an index to measure metropolitan price levels between July 1988 and June 1989 [3]. They estimate price levels in 22 CPI metropolitan areas using BLS data and calculate a mean absolute difference of 7.8% between their new index and the ACCRA Index; they conclude the ACCRA Index has substantial errors, errors that result mostly from sampling and aggregation bias. Curran et al. provide a theoretical overview of alternative cost of living measures, concentrating on those calculated by the Council for Community and EconomicResearch(also knownasC2ER), theNational Research Council (NRC), and the Economic Research Institute [4]. They conclude C2ER's measure, the ACCRA Index, is best, because it includes prices of a broad set of goods (not just housing) and carefully specifies the goods to be priced. They fault NRC's measure for ignoring nonhousing prices and for using a biased measure of housing costs (Fair Market Rents calculated by the Department of Housing and Urban Development). They fault the Economic Research Institute's measure for inconsistencies in the goods priced and for implausible component weights for low income families.

Between 1991 and 2008, at least six articles relied solely on the ACCRA Index to measure living costs: Browne and Trieschmann's study of the compensation of full professors at research universities [5], Cutler and Glaeser's examination of residential segregation's impact on real earnings differentials between African American workers and other workers [6], Gisser and Davila's analysis of earnings differences between unskilled farm workers and unskilled urban workers [7], Olson et al. …

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