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Location, location, location: The 3L Approach to house price determination

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  • Kiel, Katherine A.
  • Zabel, Jeffrey E.

Abstract

The immobility of houses means that their location affects their values. This explains the common belief that three things determine the price of a house: location, location, and location. We use this notion to develop the 3L Approach to house price determination. That is, prices are determined by the Metropolitan Statistical Area (MSA), town, and street where the house is located. This study creates a unique data set based on data from the American Housing Survey (AHS) consisting of small 'clusters' of housing units with information on structure and resident characteristics that is merged with census tract-level attributes. We use these data to test the 3L Approach: we find that all three levels of location are significant when estimating the house price hedonic equation. This indicates that the concept of "neighborhood" is multifaceted; individuals care about their very local surroundings such as the general upkeep of their street and possibly their neighbors' characteristics (cluster variables), and a broader area such as the school district and/or the town that accounts for school quality and crime rates (tract variables). We show that price indices and evidence of discrimination and prejudice in the housing market are affected if all three levels of location are not included in the house price hedonic model.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Housing Economics.

Volume (Year): 17 (2008)
Issue (Month): 2 (June)
Pages: 175-190

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Handle: RePEc:eee:jhouse:v:17:y:2008:i:2:p:175-190

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Web page: http://www.elsevier.com/locate/inca/622881

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  1. Hardman, Anna & Ioannides, Yannis M., 2004. "Neighbors' income distribution: economic segregation and mixing in US urban neighborhoods," Journal of Housing Economics, Elsevier, vol. 13(4), pages 368-382, December.
  2. Zabel, Jeffrey E, 1999. "Controlling for Quality in House Price Indices," The Journal of Real Estate Finance and Economics, Springer, vol. 19(3), pages 223-41, November.
  3. Murphy, Kevin M & Topel, Robert H, 1985. "Estimation and Inference in Two-Step Econometric Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(4), pages 370-79, October.
  4. Myers, Caitlin Knowles, 2004. "Discrimination and neighborhood effects: understanding racial differentials in US housing prices," Journal of Urban Economics, Elsevier, vol. 56(2), pages 279-302, September.
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  6. Yannis M. Ioannides & Jeffrey E. Zabel, 2002. "Interaction, Neighborhood Selection and Housing Demand," Discussion Papers Series, Department of Economics, Tufts University 0208, Department of Economics, Tufts University.
  7. Yannis M. Ioannides & Jeffrey E. Zabel, 2000. "Neighborhood Effects and Housing Demand," Discussion Papers Series, Department of Economics, Tufts University 0012, Department of Economics, Tufts University.
  8. Mills, Edwin S. & Simenauer, Ronald, 1996. "New Hedonic Estimates of Regional Constant Quality House Prices," Journal of Urban Economics, Elsevier, vol. 39(2), pages 209-215, March.
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  17. Kiel, Katherine A. & Zabel, Jeffrey E., 1996. "House Price Differentials in U.S. Cities: Household and Neighborhood Racial Effects," Journal of Housing Economics, Elsevier, vol. 5(2), pages 143-165, June.
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Cited by:
  1. Yannis M. Ioannides, 2010. "Neighborhood Effects and Housing," Discussion Papers Series, Department of Economics, Tufts University 0747, Department of Economics, Tufts University.
  2. Kim, Young Se & Rous, Jeffrey J., 2012. "House price convergence: Evidence from US state and metropolitan area panels," Journal of Housing Economics, Elsevier, vol. 21(2), pages 169-186.
  3. Leung, Tin Cheuk & Tsang, Kwok Ping, 2011. "Love Thy Neighbor: Income Distribution and Housing Preferences," MPRA Paper 32599, University Library of Munich, Germany.
  4. Steve Gibbons & Henry G. Overman & Eleonora Patacchini, 2014. "Spatial Methods," SERC Discussion Papers 0162, Spatial Economics Research Centre, LSE.
  5. Lee Chun Chang & Hui-Yu Lin, 2012. "The Impact of Neighborhood Characteristics on Housing Prices-An Application of Hierarchical Linear Modeling," International Journal of Management and Sustainability, Pak Publishing Group, vol. 1(2), pages 31-44, 12-2012.
  6. Katherine Kiel, 2006. "Environmental Contamination and House Values," Working Papers 0601, College of the Holy Cross, Department of Economics.
  7. Carlos Pestana Barros & Zhongfei Chen & Luis A. Gil-Alana, 2012. "Housing sales in urban Beijing," Applied Economics, Taylor & Francis Journals, vol. 44(34), pages 4495-4504, December.
  8. Gouriéroux, Christian & Laferrère, Anne, 2009. "Managing hedonic housing price indexes: The French experience," Journal of Housing Economics, Elsevier, vol. 18(3), pages 206-213, September.

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