A Semiparametric Method for Estimating Local House Price Indices

Spatial autoregressive hedonic models utilize house prices lagged in space and time to produce local house price indices, for example, the spatial and temporal autoregressive (STAR) model might be used this way. This paper complements these models with a semiparametric approach, the Local Regression Model (LRM). The greater flexibility of the LRM may allow it to identify space–time asymmetries missed by other models. The LRM is fitted to 49,511 sales from 1972Q1 to 1991Q2 in Fairfax County, Virginia. The local price indices display plausible and significant variations over space and time. The LRM price indices in selected neighborhoods are shown to differ significantly from those in some other neighborhoods. A new method for estimating standard errors addresses an overlooked problem common to all local price indices: how to evaluate the amount of noise in the estimates. Out-of-sample prediction errors demonstrate that LRM adds significant information to the hedonic model.     

Dwelling Age Heteroskedasticity in Repeat Sales House Price Equations

Several authors have attributed the heteroskedasticity observed in repeat sales house price equations to the length of time between sales. Recently, Goodman and Thibodeau (1995) developed a theoretical model that relates heteroskedasticity in hedonic house price equations to dwelling age. Using data for nearly 2,000 repeat sales in Dallas, Texas, this research examines whether repeat sales heteroskedasticity is related to dwelling age, to the length of time between sales, or to both. An iterative generalized least squares procedure that explicitly models the residual variance is used to obtain robust parameter estimates and to increase the efficiency of the usual repeat sales price indices.     

Do House Price Levels Anticipate Subsequent Price Changes within Metropolitan Areas?

This research examines the relationship between hedonically controlled housing price levels and subsequent changes in those prices across locations within MSAs. Are areas with a high price relative to an “imputed rent” paying for higher appreciation? In an efficient market (e.g., Gordon Growth Model), as fundamentals (impute rent) differ across locations and change over time, anticipation of these should generate a positive correlation between (residual) price levels and subsequent price changes. We undertake these tests in four different MSAs using a panel of repeat‐sale house price indices that have been scaled to price levels with the hedonic attributes of the house and ZIP code. In three markets we find that identical houses in higher priced ZIP codes subsequently appreciate faster. In one market we find that there is little statistical difference.     

A Varying Parameters Approach to Constructing House Price Indexes

Conventional housing price index models assume interperiodparameter stability and typically employ either repeat sales or hedonic methodologies. This paper introduces a method of index construction that combines multiple sales observations with single sale transactions while permitting characteristics prices from hedonic regressions to vary over time. A test for interperiod parameter stability is provided. Each period's data are arranged by location and repeat sales are matched by rows. This construction allows greater use of sample information and acknowledges the unique contribution of repeat sales to the estimation process. It also produces intertemporal error correlations that can be beneficially exploited by the seemingly unrelated regressions (SUH) technique. The paper also demonstrates a significance test for error correlation and discusses the treatment of unequal numbers of observations among index periods.     

Predicting Spatial Patterns of House Prices Using LPR and Bayesian Smoothing

This article is motivated by the limited ability of standard hedonic price equations to deal with spatial variation in house prices. Spatial patterns of house prices can be viewed as the sum of many causal factors: Access to the central business district is associated with a house price gradient; access to decentralized employment subcenters causes more localized changes in house prices; in addition, neighborhood amenities (and disamenities) can cause house prices to change rapidly over relatively short distances. Spatial prediction (e.g., for an automated valuation system) requires models that can deal with all of these sources of spatial variation. We propose to accommodate these factors using a standard hedonic framework but incoporating a semiparametric model with structure in the residuals modeled with a partially Bayesian approach. The Bayesian framework enables us to provide complete inference in the form of a posterior distribution for each model parameter. Our model allows prediction at sampled or unsampled locations as well as prediction interval estimates. The nonparametric part of our model allows sufficient flexibility to find substantial spatial variation in house values. The parameters of the kriging model provide further insights into spatial patterns. Out–of–sample mean squared error and related statistics validate the proposed methods and justify their use for spatial prediction of house values.     

Financing Residential Development with Special Districts

This paper empirically examines the extent to which the property tax liability created by financing residential infrastructure using special district bonds is capitalized in house prices. We compare house prices for single‐family detached homes built within development districts to similar properties located outside development districts. Our hedonic specification includes the usual housing characteristics and controls for the influence of spatial attributes using Census Block Group “neighborhood” fixed effects. The preferred empirical specification restricts the data to neighborhoods that have numerous sales of recently constructed single‐family detached homes located both within and outside development districts. The empirical results indicate that house prices for homes located within development districts are lower than house prices for similar homes located outside of development districts, but the amount of property tax capitalization is significantly less than full. Results depend on our Generalized Methods of Moments estimator, which instruments property tax rates using the characteristics of development districts. We identify valid instruments by restricting transactions to properties located in rapidly growing suburban developments.     

Housing Renovations and the Quantile Repeat-Sales Price Index

A median-based quantile estimator suffers less bias from positive outliers, such as unobserved renovations, than a standard mean-based estimator. Quantile repeat-sales estimates for single-family homes in the city of Chicago show nominal price appreciation of 68.9% between 1993 and 2002, substantially smaller than the standard approach's estimate of 77.8%. Omitting observations with building permits reduces the mean and median-based estimates by 4.4 and 1.6 percentage points. The results imply that quality improvements account for much of the rapid rise in house prices, and that a median-based quantile estimator produces a more accurate view of the price performance of a typical house.     

The Accuracy of Owner-Provided House Values: The 1978–1991 American Housing Survey

The American Housing Survey (AHS) includes the owner's valuation of the house as a measure of the house's value. If owner-stated values are accurate, the AHS (as well as other survey instruments) can be used by researchers studying a variety of topics. In this study we use the metropolitan version of the AHS for three cities over fourteen years to compare owners' valuations with sales prices of houses that sold in the twelve months prior to an interview. We find that, on average, recent buyers report house values that are 8.4% higher than the stated sales prices. Further analysis indicates that these recent buyers, when compared with owners with longer tenure, overvalue their houses by 3.3%, on average. Thus, we find that the average owner overvalues his house by 5.1%. Also, differences between sales prices and owners' valuations are not related to particular characteristics of the house, occupants (other than length of tenure), or neighborhood. Thus, the use of the owners' valuations will result in accurate estimates of house price indexes and will provide reliable estimates of the prices of house and neighborhood characteristics.     

The Economics of Style: Measuring the Price Effect of Neo‐Traditional Architecture in Housing

Vintage effects have received considerable attention from economists in the context of house prices. Although strongly related, the impact of architectural building styles on prices has not been studied yet. Using a cross‐sectional hedonic price analysis including building styles of recently developed homes in the Netherlands we find a significant price premium for housing with neo‐traditional architecture. Extensive intervention by local authorities on the supply side of the housing market seems the most probable explanation of this effect. The decreasing price premium over time reflects the impact of supply restrictions on price, but also indicates that style does matter.     

Estimating Bargaining Effects in Hedonic Models: Evidence from the Housing Market

Bargaining is common in markets for heterogeneous goods and differences in bargaining power between buyer and seller affect the negotiated transaction price. Previous research has found systematic evidence in the housing markets that weak buyers pay higher prices and weak sellers receive lower prices for their homes. Earlier work has modeled the bargaining effect as a parallel shift in the hedonic function, implicitly assuming that attribute shadow prices were unaffected by the bargaining process. In this paper, we use a sample of home sales where the seller's bargaining power is weakened by the fact that the home is vacant at the time of sale to test whether the effect of bargaining is best captured by a shift in the hedonic constant or whether the attribute shadow prices vary as well. The question is significant for property valuation where estimation of the marginal value of an attribute is commonly used to adjust comparable sales data. We find strong confirmation that bargaining power influences the negotiated price. We also find evidence that bargaining power alters attribute prices, although we do not find a consistent pattern across markets.     

The Relationship between Median and Constant Quality House Prices: Implications for Setting FHA Loan Limits

This paper examines the relationship between the asset price of housing and median sales price. We demonstrate: (1) median house prices (as reported by the National Association of Realtors) overstate the increase in constant-quality house prices by about 2% per year over the 1976–1985 period; and (2) regional differences in median house prices and their rates of increase, respectively, are systematically related to regional differences in real incomes and their rates of increase. We use these results to evaluate the recent proposal to raise the FHA maximum loan limit ceiling from the current ceiling of $124,750 to 95% of the area median house price.     

Oil Prices and Urban Housing Demand

We develop a model of a monocentric, oil‐exporting city. The model predicts a “twist” (rotation combined with a level shift) of the house price gradient with an oil price change due to the combined producer price and transportation cost effects. Empirical findings support the predictions, with house price changes positively linked to the price of oil in cities specialized in oil and gas‐related industries, and negatively linked in suburban areas of all cities. These results quantify the large and differential risks to house prices associated with oil price changes both within and across cities. Overall, estimates suggest a 50% change in the price of oil results in a city‐wide house price change of 15% over five years in a city specialized in the production of oil (export employment share of 50%), whereas house prices for units greater than 15 miles from the city‐center change in relative terms by ?1.5% over the same period.     

An Empirical Examination of Traditional Neighborhood Development

This study analyzes the impact of the new urbanism on single-family home prices. Specifically, we explore the price differential that homebuyers pay for houses in new urbanist developments relative to houses in conventional suburban developments. Using data on over 5,000 single-family home sales from 1994 to 1997 in three different neighborhoods, hedonic regression results reveal that consumers pay more for homes in new urbanist communities than those in conventional suburban developments. Further analyses indicate that the price premium is not attributable to differences in improvement age and other housing characteristics.     

Housing Attributes Associated with Capital Gain

Housing units are heterogeneous goods. Rates of change in housing prices are typically modelled as if they arise from factors unrelated to the housing unit itself. For example, housing price increases in the latter part of the 1970s and early 1980s are argued to have arisen primarily from demographic factors and the differential effects of inflation on the effective rate of taxation on income from corporate capital and on owner-occupied housing. Cross-sectional variation in price inflation is not addressed. Consumers who purchased housing units are not indifferent to their attributes. To the extent that expectations vary within regional housing markets as a consequence of variation in housing attributes, standard linear hedonic price regression may generate biased estimates of implicit prices. This paper identifies sufficient conditions for the estimates of implicit prices in linear hedonic price regressions to be unbiased and generate unbiased estimates of implied price changes. Finally, this paper identifies living space (house size) as a significant attribute related positively to the increase in individual housing prices in a regional market.     

Variation Across Price Segments and Locations: A Comprehensive Quantile Regression Analysis of the Sydney Housing Market

Standard house price indices measure average movements of average houses in average locations belonging to an average price segment and hence obscure spatial and cross‐sectional variation of price appreciation rates even within a single metropolitan area. This article combines penalized quantile regression techniques with the hedonic imputation approach to reveal such kind of variation. The method is applied to house transactions from Sydney between 2001 and 2014. The analysis finds significant variation across sub‐markets over time and in particular during the boom‐and‐bust cycle peaking in 2004. Appreciation rates were highest for suburban, low‐priced and lowest for inner‐city, high‐priced houses.     

Dynamic Pricing,Advance Sales and Aggregate Demand Learning in Airlines

This paper uses a unique U.S. airlines panel data set to study empirically the dynamic pricing of inventories with uncertain demand over a finite horizon. I estimate a dynamic pricing equation and a dynamic demand equation that jointly characterize the adjustment process between prices and sales as the flight date nears. I find that the price increases as the inventory decreases, and decreases as there is less time to sell. Consistent with aggregate demand learning and price adjustment, demand shocks have a positive and much larger effect on prices than the positive effect of anticipated sales.     

The Economic Impact of Anticipated House Price Changes—Evidence from Home Sales

If realized house prices have the wealth effect and the collateral effect on the economy, anticipated house price changes should have similar economic effects. This article empirically analyzes the effects of single‐family home sales, which are shown to be able to predict house prices in the literature, on economic production, using 372 metropolitan statistic areas in the United States from the first quarter of 1981 to the second quarter of 2008 in a panel vector error correction model. Changes in home sales are found to Granger because the growth rate of per‐capita gross metropolitan product and the dynamic effects are visualized with impulse response functions. Supporting evidence for the economic impact of home sales is also found in contemporaneous regressions.     

Rational Expectations, Market Fundamentals and Housing Price Volatility

This paper derives a forward-looking rational expectations house price model and empirically tests its ability to explain short-run fluctuations in real house prices. A novel approach to proxying the imputed rents of owner-occupied housing, as a function of observable housing market fundamentals, is combined with a housing market arbitrage relation to derive a present value model for real house prices. Tests of the rational expectations, nonlinear cross-equation restrictions reject the joint null hypothesis of rational expectations and the asset-based housing price model for quarterly, single-detached house prices in the city of Vancouver, British Columbia from 1979–1991. The model fails to fully capture observed house price dynamics in two real estate booms but tracks real house prices well in less volatile times, suggesting that prices may temporarily deviate from fundamental values in real estate price cycles.     

The Gender Gap in Real Estate Sales: Negotiation Skill or Agent Selection?

This study examines differences in net selling price for residential real estate across male and female agents. A sample of 2,020 home sales transactions from Fulton County, Georgia, are analyzed in a two‐stage least squares, geospatial autoregressive corrected, semi‐log hedonic model to test for gender and gender selection effects. Although agent gender seems to play a role in naïve models, its role becomes inconclusive as variables controlling for possible price and time on market expectations of the buyers and sellers are introduced to the models. Clear differences in real estate sales prices, time on market and agent incomes across genders are unlikely due to differences in negotiation performance between genders or the mix of genders in a two‐agent negotiation. The evidence suggests an interesting alternative to agent performance: that buyers and sellers with different reservation price and time on market expectations, such as those selling foreclosure homes, tend to select agents along gender lines.     

The Impact on Housing Values of Restrictions on Rights of Ownership: The Case of an Occupant's Age

With the exception of anecdotal information, little is known about the specific effects on the value of a house because its ownership is restricted to people older than a certain age. This article provides an empirically-derived assessment of the impact on the selling price of single-family residences when their ownership is age restricted. To determine the effect on the sales price of age-restricted houses, a standard hedonic pricing model is applied to a sample of 371 sales transactions drawn from a suburban area of a large city. The results indicate that an age restriction placed on houses decreases their value by 6%. This finding may be of interest to local land-use regulators, developers who are considering developing age-restricted houses and appraisers who wish to make value adjustments to these homes.