Local Housing Data Leads to More Accurate COL Differentials

by Marillyn Tefft, Senior Researcher 28. February 2013 13:24

For most locations, housing is the largest expenditure component for calculating cost of living (COL). While the S&P/Case-Shiller House Price Index (released monthly) and the National Association of Realtors (NAR) Median Existing-Home Sales Price (released quarterly) both provide valuable aggregate housing data for Metropolitan Statistical Area (MSA) level housing costs, more granular data are often required for refined COL analyses.

Whether you are calculating the relocation of a specific individual or developing your organization’s relocation policies, only using MSA-level housing data may not provide the most accurate COL differentials.

For this reason, ERI collects and analyzes data at the city and neighborhood level. Our Relocation Assessor dataset of single-family home sales price is refined further to compare homes of similar size and amenities in specific locations (typically desirable to management/professional households).   

To highlight the importance of local data, let’s examine cost-of-living differentials between Chicago, IL, and Washington, D.C., using the NAR Median Existing Home-Sales Price figures for Q4 2012 (preliminary, not seasonally adjusted) compared with ERI’s January 2013 dataset.

NAR provides estimated home prices from the Chicago-Naperville-Joliet, IL, and Washington-Arlington-Alexandria, DC-VA-MD-WV, MSAs as its data collection area and includes data for all single-family homes. ERI uses data from within the city limits of Chicago and Washington, D.C., which includes neighborhoods and areas of each city that appeal to management/professional households.

Using NAR data rather than the more specific Relocation Assessor data leads to substantially different cost-of-living calculations. The NAR data (Chicago $167,000 and D.C. $353,000) results in a 6.1% increase in cost of living in a move from Chicago to Washington, D.C. ERI’s data (Chicago $303,551 and D.C. $604,944) shows an 11.7% increase.

 

The increase is even more pronounced (23.8% differential) when housing data from a specific neighborhood in D.C. (Van Ness $890,661) is used. It is likely that, when relocating to a new area, a household has specific neighborhoods or areas within the city that are of primary interest. Home prices can vary dramatically within a few blocks and most certainly differ within a MSA.

Further considerations for defensible cost-of-living data include differences in state income taxes, local property tax, home maintenance, insurance, and utility costs. With a higher mortgage, the homeowner is entitled to a mortgage interest deduction, which can be substantial in locations with higher home prices, such as Washington D.C.

The take away: Use credible housing price data related to the specific type of home in the particular locations of interest to calculate relevant cost-of-living differentials.