| Explaining Home Appreciation |
| Written by Bill Russell | |
| 06.21.2007 | |
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Discuss this article on the forums. (0 posts) To further our analysis Jonathan started earlier this week, and follow up a suggestion from a reader, I decided to test a couple more series to see which best explain home price appreciation. A reader suggested that year-to-year job changes are too noisy to properly measure the full impact of employment on appreciation, so I calculated 5-year growth rates from 2001 – 2006 for both employment and home prices. The scatter plot is presented below. The R-squared for this relationship is .190, very similar to the R-squared from the one-year growth rate.  It was also suggested that we look at the relationship between the growth of wealth or income and home price appreciation. I don’t have any data on wealth but I do have several measures of income, including per capita GDP, per capita personal income, and median income. I ran the 5-year growth of these three measures of income against home appreciation. Median income growth was the clear winner. The chart below presents the relationship between 5-year median income growth and home appreciation. The relationship is fairly strong, but median income growth is not as good a predictor of home price appreciation as job growth since it has a lower R-squared value.
 
We're always looking for feedback from our readers.
No. 1 : Great job at responding to your user base. Dr. Russell's further analysis was both insightful as well as informative. This type of analytical response along with the commentary by Jonathon Smoke is a must read for any user that has an interest in the housing market. Keep up the good work! Bob, IL |
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