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

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Author Info
Kiel, Katherine A.
Zabel, Jeffrey E.

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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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Publisher 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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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416. [Downloadable!] (restricted)
  2. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb.. [Downloadable!] (restricted)
  3. Anna Hardman & Yannis Ioannides, 2004. "Income Mixing and Housing in U.S. Cities: Evidence from Neighborhood Clusters of the American Housing Survey," Discussion Papers Series, Department of Economics, Tufts University 0420, Department of Economics, Tufts University. [Downloadable!]
  4. 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. [Downloadable!] (restricted)
  5. Goodman, John Jr. & Ittner, John B., 1992. "The accuracy of home owners' estimates of house value," Journal of Housing Economics, Elsevier, vol. 2(4), pages 339-357, December. [Downloadable!] (restricted)
  6. Gyourko, Joseph & Tracy, Joseph, 1991. "The Structure of Local Public Finance and the Quality of Life," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 774-806, August. [Downloadable!] (restricted)
  7. Strange, William, 1992. "Overlapping neighborhoods and housing externalities," Journal of Urban Economics, Elsevier, vol. 32(1), pages 17-39, July. [Downloadable!] (restricted)
  8. Schelling, Thomas C, 1969. "Models of Segregation," American Economic Review, American Economic Association, vol. 59(2), pages 488-93, May. [Downloadable!] (restricted)
  9. DiPasquale, Denise & Somerville, C. Tsuriel, 1995. "Do House Price Indices Based on Transacting Units Represent the Entire Stock? Evidence from the American Housing Survey," Journal of Housing Economics, Elsevier, vol. 4(3), pages 195-229, September. [Downloadable!] (restricted)
  10. Ioannides, Yannis M., 2002. "Residential neighborhood effects," Regional Science and Urban Economics, Elsevier, vol. 32(2), pages 145-165, March. [Downloadable!] (restricted)
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  11. Yannis M Ioannides & Jeffrey E Zabel, 2002. "Interactions, Neighborhood Selection, and Housing Demand," Working Papers 02-19, Center for Economic Studies, U.S. Census Bureau. [Downloadable!]
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  12. Roback, Jennifer, 1982. "Wages, Rents, and the Quality of Life," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1257-78, December. [Downloadable!] (restricted)
  13. 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. [Downloadable!] (restricted)
  14. Hoyt, William H. & Rosenthal, Stuart S., 1997. "Household Location and Tiebout: Do Families Sort According to Preferences for Locational Amenities?," Journal of Urban Economics, Elsevier, vol. 42(2), pages 159-178, September. [Downloadable!] (restricted)
  15. 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. [Downloadable!]
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Cited by:
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  1. Katherine Kiel, 2006. "Environmental Contamination and House Values," Working Papers 0601, College of the Holy Cross, Department of Economics. [Downloadable!]
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