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A Hybrid Cost and Market-Based Estimator for Appraisal

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Abstract

Straightforward application of OLS to statistical mass appraisal models does not always produce defensible estimates due to debilitating levels of multicollinearity in the data as appraisers attempt to improve the predictive ability of their models through the inclusion of a long list of correlated property characteristics. The traditional cost approach does not suffer from this malady, but often does not predict market values well. An ideal assessment method would combine the predictive power of statistical appraisal models with the lack of cross-sectional error from the cost approach. This paper presents such a method and demonstrates its advantages both theoretically and empirically. The hybrid estimator, based upon a priori information and current market data is superior in prediction to standard OLS estimation under a variety of conditions. This superiority is demonstrated through cross-validation on random hold-out samples of various sizes.

Suggested Citation

  • Otis W. Gilley & R. Kelley Pace, 1990. "A Hybrid Cost and Market-Based Estimator for Appraisal," Journal of Real Estate Research, American Real Estate Society, vol. 5(1), pages 75-88.
  • Handle: RePEc:jre:issued:v:5:n:1:1990:p:75-88
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    References listed on IDEAS

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    1. Alan K. Reichert & James S. Moore, 1986. "Using Latent Root Regression to Identify Nonpredictive Collinearity in Statistical Appraisal Models," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 14(1), pages 136-152.
    2. Kerry D. Vandell & Robert H. Zerbst, 1984. "Estimates of the Effect of School Desegregation Plans on Housing Values Over Time," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 12(2), pages 109-135.
    3. James S. Moore & Alan K. Reicheri & Chien-Ching Cho, 1984. "Analyzing the Temporal Stability of Appraisal Model Coefficients: An Application of Ridge Regression Techniques," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 12(1), pages 50-71.
    4. Anderson, John E., 1981. "Ridge estimation of house value determinants," Journal of Urban Economics, Elsevier, vol. 9(3), pages 286-297, May.
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    Cited by:

    1. Brent W. Ambrose, 1990. "An Analysis of the Factors Affecting Light Industrial Property Valuation," Journal of Real Estate Research, American Real Estate Society, vol. 5(3), pages 355-370.
    2. Joseph B. Lipscomb & J. Brian Gray, 1995. "A Connection between Paired Data Analysis and Regression Analysis for Estimating Sales Adjustments," Journal of Real Estate Research, American Real Estate Society, vol. 10(2), pages 175-184.

    More about this item

    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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