Repeat Sales as a Matching Estimator

The most common approaches for constructing house price indices—hedonic price functions and the repeat sales estimator—focus on changes over time in mean prices. Though the hedonic approach is less wasteful of data than the repeat sales estimator, it relies on an accurate specification of the underlying econometric model. I suggest using a matching estimator as an alternative to the hedonic and repeat sales approaches. Like the repeat sales approach, a matching estimator uses pairs of sales from different dates to estimate the mean difference in sales prices over time. The matching approach preserves much larger sample sizes than the repeat sales estimator while requiring less preimposed structure than the hedonic approach. The matching approach makes it easy to characterize changes in the full distribution of house prices.     

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 Bias of the RSR Estimator and the Accuracy of Some Alternatives

This paper analyzes the implications of cross-sectional heteroskedasticity in the repeat sales regression (RSR). RSR estimators are essentially geometric averages of individual asset returns because of the logarithmic transformation of price relatives. We show that the cross-sectional variance of asset returns affects the magnitude of the bias in the average return estimate for each period, while reducing the bias for the surrounding periods. It is not easy to use an approximation method to correct the bias problem. We suggest an unbiased maximum likelihood alternative to the RSR that directly estimates index returns, which we term MLRSR. The unbiased MLRSR estimators are analogous to the RSR estimators but are arithmetic averages of individual asset returns. Simulations show that these estimators are robust to time-varying cross-sectional variance and that the MLRSR may be more accurate than RSR and some alternative methods.     

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.     

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.     

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.     

On Choosing Among House Price Index Methodologies

This paper compares housing price indices estimated using three models with several sets of property transaction data. The commonly used hedonic price model suffers from potential specification bias and inefficiency, while the weighted repeat-sales model presents potentially more serious bias and inefficiency problems. A hybrid model combining hedonic and repeat-sales equations avoids most of these sources of bias and inefficiency. This paper evaluates the performance of each type of model using a particularly rich local housing market database. The results, though ambiguous, appear to confirm the problems with the repeat sales model but suggest that systematic differences between repeat-transacting and single-transacting properties lead to bias in the hedonic and hybrid models as well.     

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.     

A Flexible Fourier Approach to Repeat Sales Price Indexes

Time periods are typically highly aggregated for repeat sales estimators because of the small number of observations available in some periods. We use a flexible Fourier expansion to account for time, which we treat as a continuous variable. Our estimator saves degrees of freedom and enables us to estimate the price index efficiently even for times with few sales. We present estimated price indexes for the City of Chicago, Cook County, and several suburbs.     

Idiosyncratic Risk of House Prices: Evidence from 26 Million Home Sales

This paper uses about 26 million home sales to measure house price idiosyncratic risk for 7,580 U.S. zip codes during three periods: (1) when the U.S. housing market was stable (1996–2000), (2) booming (2001–2007) and (3) busting (2007–2012), and investigates the determinants of house price risk. We find very strong relationships between risk and some basic housing market characteristics. There is a U‐shaped relationship between risk and zip‐code level median household income; risk is higher in zip codes with more appreciation volatility; and risk is not compensated with higher appreciation.     

The Price Effects of Cash versus Mortgage Transactions

This paper investigates the price effects of cash versus mortgage transactions. Our hypothesis that home sales involving all-cash transactions will sell at discount is borne out by the results of this study. Analyzing a sample of comparable row home dwelling units, we find that all-cash transactions are associated with roughly a 13% price discount relative to transactions involving financing terms that are typical of the market. Cash is King. The findings are consistent with theories regarding buyer—seller behavior.     

Robust Repeat Sales Indexes

Using single‐family sales data for Louisville, Kentucky, we show the benefits of applying robust methods to down‐weight problematic transactions in a repeat sales context. Robust estimators reduce the influence of outliers in repeat sales price changes that are due to data entry errors, quality changes or nonmarket transactions. In addition to comparing conventional and robust indexes, we also use simulated data, where the correct index is known, to show that robust methods control for the impacts of contaminated data. Finally, we demonstrate that robust methods reduce the magnitude and volatility of index revisions.     

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.     

New Evidence on Home Prices from Freddie Mac Repeat Sales

The weighted repeat sales price index methodology recently reported in Case and Shiller [5] [6] is applied to a dataset of over eight million loans bought by the Federal Home Loan Mortgage Corporation over the last twenty years. Regional price indices are reported and compared to indices from other sources. Statistical issues in the creation of the index, both technical and due to sample selectivity of the Freddie Mac dataset, are extensively discussed. It is found that the new index grows at a rate similar to other indices up until 1985, after which time it grows at a significantly higher rate.     

Housing Supply,Land Costs and Price Adjustment

We analyze relationships between housing supply elasticities, land costs and house price dynamics, contributing three main insights. First, higher housing supply elasticities help contain short‐run price spikes following demand shocks. Second, land price dynamics influence this relationship; supply responses are lessened and house price spikes are exacerbated as land prices increase. Third, we estimate a system of regional equations modeling housing supply using a Tobin's‐q specification (incorporating construction and land costs) and show that regional price dynamics are a function of the region's supply elasticity.     

Marking Single–Family Property Values to Market

This paper is the text of the 2001 Presidential Address for the American Real Estate and Urban Economics Association. House price prediction accuracy is a function of: (1) the procedure used to identify within–metropolitan–area housing submarket boundaries, (2) the econometric technique used to estimate the parameters of the house price model and (3) the characteristics of the local housing market. This paper empirically examines several procedures for delineating within–metropolitan–area housing submarket boundaries. In addition, the paper examines the increase in prediction accuracy that can be achieved by employing spatial econometric techniques to spatially adjust ordinary least squares house price predictions. Finally, the paper examines the influence that local housing market characteristics have on house price prediction accuracy. Housing market characteristics examined here are: (1) structural characteristics of neighborhood properties, (2) heterogeneity of the neighborhood housing stock and (3) housing market liquidity. Prediction accuracy is examined using hedonic house price equations with over 40,000 single–family transactions for Dallas, Texas.     

Investor Confidence as a Determinant of China's Urban Housing Market Dynamics

China's urban housing market dynamics suggest that evolving investor confidence may be a relevant demand shifter. Such investors are continually updating their beliefs about the state of the macroeconomy and the policy uncertainty related to national and local housing policies. We build a 35 Chinese city real estate confidence index that varies over time and across cities. This index predicts subsequent house price appreciation and new housing sales. We document evidence of heterogeneous effects of investor confidence depending on a city's demographics and the city's elasticity of housing supply. Our results based on a new household‐level expectations survey bolster the case that investor expectations are an important determinant of real estate price dynamics.     

The Housing Market and Real Estate Brokers

The major development in this paper concerns the failure, in earlier studies, to consider interaction between alternative methods of arranging sales in the housing market. A seller may market a house by direct negotiations with buyers, without the intermediation of real estate brokers, or by listing the house with a broker. A rational seller would choose the option which offers the higher expected return on the house. In a sequence of models we argue that the seller's option of a method of sale induces competitive pressure in the choice of the commission rate by the broker. We also consider the split rate in a multiple listing system, ease of entry of brokers and the cartel hypothesis as applied to brokers. We conclude that the competitive pressure of direct negotiations between sellers and buyers, relative free entry of brokers and the inappropri-ateness of the cartel hypothesis cast serious doubt about a general consensus of opinion that the brokerage system is characterized by price fixing, excessive commissions and excessive marketing costs.     

Creating Growth in New Markets: A Simultaneous Model of Firm Entry and Price*

Sales in a new market generally follow a hockey‐stick pattern: After commercialization, sales are very low for some time before there is a dramatic takeoff in growth. Reported sales takeoffs across products vary widely from a few years to several decades. Prior research identifies new firm entry or price declines as key factors that relate to the timing of a sales takeoff in new markets. However, this literature considers these variables to be exogenous and only finds unilateral effects. In the present article, new firm entry and price declines are modeled as being endogenous. Thus, the simultaneous relationship between price declines and firm entry in the introductory period of new markets when industry sales are negligible is studied. Using a sample of new markets formed in the United States during the last 135 years, strong support for a simultaneous model of price and firm entry is found: Price decreases relate to the competitive pressures associated with firm entry, and, in turn, firm entry is lower in new markets with rapidly falling prices. Furthermore, a key driver of firm entry during the early years of a new market involves the level of patent activity, and a key driver of price decreases is the presence of large firms. In contrast to the recommendations from other research, these results indicate that rapid price declines may further delay sales takeoff in industries by dampening new firm entry. Instead, rapid sales takeoffs in new markets come from encouraging greater innovative activity and the entry of large firms.