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Hedonic pricing with redevelopment options: A new approach to estimating depreciation effects

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  • Clapp, John M.
  • Salavei, Katsiaryna

Abstract

The standard hedonic model of durable assets is a special case of a more general model that contains two additive terms: (1) use value of the existing hedonic vector and (2) the value of the option to reconfigure hedonic characteristics. One empirical implication is that the two parts of value are related: e.g., use value increases with interior area whereas option value decreases with "intensity," the ratio of structure value divided by land value. Increases in building age reduce use value but increase option value. Data from Greenwich Connecticut indicate that intensity has the expected negative effect. Coefficients on building age are shown to be better measures of depreciation when intensity variables are included in the regression.

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  • Clapp, John M. & Salavei, Katsiaryna, 2010. "Hedonic pricing with redevelopment options: A new approach to estimating depreciation effects," Journal of Urban Economics, Elsevier, vol. 67(3), pages 362-377, May.
  • Handle: RePEc:eee:juecon:v:67:y:2010:i:3:p:362-377
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    3. Clapp, John M. & Bardos, Katsiaryna Salavei & Wong, S.K., 2012. "Empirical estimation of the option premium for residential redevelopment," Regional Science and Urban Economics, Elsevier, vol. 42(1-2), pages 240-256.
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    18. Cohen, Jeffrey P. & Coughlin, Cletus C. & Clapp, John M., 2015. "Local Polynomial Regressions versus OLS for Generating Location Value Estimates: Which is More Efficient in Out-of-Sample Forecasts?," Working Papers 2015-14, Federal Reserve Bank of St. Louis, revised 29 Oct 2015.
    19. John Clapp & Piet Eichholtz & Thies Lindenthal, 2012. "Real Option Value over a Housing Market Cycle: West Berlin," ERSA conference papers ersa12p264, European Regional Science Association.
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