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Do Housing Submarkets Really Matter?

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  • Steven C. BOURASSA

    (School of Urban and Public Affairs, University of Louisville)

  • Martin HOESLI

    (HEC-University of Geneva, FAME, University of Aberdeen (Business School))

  • Vincent S. PENG

    (AMP Henderson Global Investors)

Abstract

We maintain that the appropriate definition of submarkets depends on the use to which they will be put. For mass appraisal purposes, submarkets should be defined so that the accuracy of hedonic predictions will be optimized. Thus we test whether out-of-sample hedonic value predictions can be improved when a large urban housing market is divided into submarkets and we explore the effects of alternative definitions of submarkets on the accuracy of predictions. We compare a set of submarkets based on small geographical areas defined by real estate appraisers with a set of statistically generated submarkets consisting of dwellings that are similar but not necessarily contiguous. The empirical analysis uses a transactions database from Auckland, New Zealand. Price predictions are found to be most accurate when based on the housing market segmentation used by appraisers. We conclude that housing submarkets matter, and location plays the major role in explaining why they matter.

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Bibliographic Info

Paper provided by International Center for Financial Asset Management and Engineering in its series FAME Research Paper Series with number rp58.

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Date of creation: Nov 2002
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Handle: RePEc:fam:rpseri:rp58

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Keywords: Housing; Submarkets; Price Predictions; Mass Appraisal; Hedonic Method;

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  1. Rothenberg, Jerome & Galster, George C. & Butler, Richard V. & Pitkin, John R., 1991. "The Maze of Urban Housing Markets," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226729510, March.
  2. Gatzlaff, Dean H & Haurin, Donald R, 1997. "Sample Selection Bias and Repeat-Sales Index Estimates," The Journal of Real Estate Finance and Economics, Springer, vol. 14(1-2), pages 33-50, Jan.-Marc.
  3. Galster, George C., 1987. "Residential segregation and interracial economic disparities: A simultaneous-equations approach," Journal of Urban Economics, Elsevier, vol. 21(1), pages 22-44, January.
  4. Gatzlaff, Dean H. & Haurin, Donald R., 1998. "Sample Selection and Biases in Local House Value Indices," Journal of Urban Economics, Elsevier, vol. 43(2), pages 199-222, March.
  5. Allen, Marcus T & Springer, Thomas M & Waller, Neil G, 1995. "Implicit Pricing across Residential Rental Submarkets," The Journal of Real Estate Finance and Economics, Springer, vol. 11(2), pages 137-51, September.
  6. Goodman, Allen C. & Kawai, Masahiro, 1982. "Permanent income, hedonic prices, and demand for housing: New evidence," Journal of Urban Economics, Elsevier, vol. 12(2), pages 214-237, September.
  7. Goodman, Allen C & Dubin, Robin A, 1990. "Sample Stratification with Non-nested Alternatives: Theory and a Hedonic Example," The Review of Economics and Statistics, MIT Press, vol. 72(1), pages 168-73, February.
  8. Michaels, R. Gregory & Smith, V. Kerry, 1990. "Market segmentation and valuing amenities with hedonic models: The case of hazardous waste sites," Journal of Urban Economics, Elsevier, vol. 28(2), pages 223-242, September.
  9. Bourassa, Steven C. & Hamelink, Foort & Hoesli, Martin & MacGregor, Bryan D., 1999. "Defining Housing Submarkets," Journal of Housing Economics, Elsevier, vol. 8(2), pages 160-183, June.
  10. Goodman, Allen C. & Thibodeau, Thomas G., 1998. "Housing Market Segmentation," Journal of Housing Economics, Elsevier, vol. 7(2), pages 121-143, June.
  11. Harsman Bjorn & Quigley John M., 1995. "The Spatial Segregation of Ethnic and Demographic Groups: Comparative Evidence from Stockholm and San Francisco," Journal of Urban Economics, Elsevier, vol. 37(1), pages 1-16, January.
  12. Vladimir Bajic, 1985. "Housing-Market Segmentation and Demand for Housing Attributes: Some Empirical Findings," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(1), pages 58-75.
  13. Schnare, Ann B. & Struyk, Raymond J., 1976. "Segmentation in urban housing markets," Journal of Urban Economics, Elsevier, vol. 3(2), pages 146-166, April.
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