Economic Depreciation of the Residential Housing Stock of the United States, 1950-1970

B ECAUSE many capital assets lose value as they age, it is important both for tax policy and for national income and wealth accounting to be able to measure the pattern of this depreciation. The economic theory of depreciation was first presented by Harold Hotelling in 1925. There was a gap of fifty years before this seminal piece was developed in discussions of depreciation/replacement' rates by Jorgenson (1975) and by Hulten and Wykoff (1976). The desire to add together capital with different characteristics and of different vintages to form an aggregate usable in national wealth accounting stimulated further work in the estimation of depreciation patterns and rates. In 1969 Taubman and Rasche investigated depreciation for office buildings, while in 1970 Wykoff did likewise for automobiles. The purpose of this article is to present a technique for estimating depreciation/replacement rates for the residential stock of housing using data for the United States, 1950-1970, and to compare these estimates with rates calculated by others for specific types of residential housing. This research relies upon the following assumption made explicit in Wykoff (1970): all housing capital, regardless of type, depreciates in the same fashion. Though this assumption is called into question by the results of Wykoff's research for automobiles, it is not formally tested here because of data limitations. In addition, depreciation/replacement rates are calculated in two ways. The first uses benchmarks that reflect the change in price or market value of units over time only, and the second uses benchmarks that reflect this price change plus the cost of maintenance and repair expenditures for the units. In the following section the theory underlying the depreciation/replacement rate estimation technique is presented, and the calculation of benchmarks for housing units of new equivalents, an essential step in the process, is covered in detail. Section C contains comparisons of benchmarks and depreciation/replacement rate estimates, and in section D, conclusions are drawn from the research as a whole.