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Estimating Hedonic Functions for Rents and Values in the Presence of Unobserved Heterogeneity in the Quality for Housing

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Abstract

A central challenge in estimating models with heterogeneous housing is separating quality from price. We provide a new method for estimating hedonic functions for rental rates and housing values treating housing quality as unobserved by the econo- metrician. Our method also deals with the problem that rental prices and housing values are partially latent showing that the rent-to-value ratio is non-parameterically identified. We, thus provide an integrated treatment of non-linear pricing rental and asset markets. Our new method can be used to gain some new insights into the causes and effects of the recent housing market crisis in the U.S. Our main application focuses on the housing markets of Miami (Fl) which experienced an average real appreciation of housing values of 65 percent during the period from 2002 to 2007. Our findings are broadly consistent with the view that changes in credit market conditions for low income houses together with changes in investor expectations about future housing prices may have accounted for the large run-up in housing values.

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Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 2013-E26.

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Handle: RePEc:cmu:gsiawp:388859950

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Postal: Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890
Web page: http://www.tepper.cmu.edu/

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Web: http://student-3k.tepper.cmu.edu/gsiadoc/GSIA_WP.asp

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  1. Poterba, James M, 1992. "Taxation and Housing: Old Questions, New Answers," American Economic Review, American Economic Association, vol. 82(2), pages 237-42, May.
  2. Dunz, Karl, 1989. "Some comments on majority rule equilibria in local public good economies," Journal of Economic Theory, Elsevier, vol. 47(1), pages 228-234, February.
  3. Thomas J. Nechyba, 2000. "Mobility, Targeting, and Private-School Vouchers," American Economic Review, American Economic Association, vol. 90(1), pages 130-146, March.
  4. Patrick Bajari & C. Lanier Benkard, 2005. "Demand Estimation with Heterogeneous Consumers and Unobserved Product Characteristics: A Hedonic Approach," Journal of Political Economy, University of Chicago Press, vol. 113(6), pages 1239-1276, December.
  5. Thomas J. Nechyba, 1996. "Local Property and State Income Taxes: The Role of Interjurisdictional Competition and Collusion," NBER Working Papers 5419, National Bureau of Economic Research, Inc.
  6. Edward L. Glaeser & Joseph Gyourko, 2001. "Urban Decline and Durable Housing," NBER Working Papers 8598, National Bureau of Economic Research, Inc.
  7. Bartik, Timothy J, 1987. "The Estimation of Demand Parameters in Hedonic Price Models," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 81-88, February.
  8. Poterba, James M, 1984. "Tax Subsidies to Owner-occupied Housing: An Asset-Market Approach," The Quarterly Journal of Economics, MIT Press, vol. 99(4), pages 729-52, November.
  9. Kamila Sommer & Paul Sullivan & Randal Verbrugge, 2010. "Run-up in the House Price-Rent Ratio: How Much Can Be Explained by Fundamentals?," Working Papers 441, U.S. Bureau of Labor Statistics.
  10. Steven Berry & Ariel Pakes, 2007. "The Pure Characteristics Demand Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(4), pages 1193-1225, November.
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