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Location, Location, Location: The 3L Approach to House Price Determination

  • Jeffrey Zabel
  • Katherine Kiel

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 their housing characteristics and resident characteristics that is merged with census tract-level attributes. We use this data to verify the 3L Approach: we find that all three levels of location are significant when estimating the house price hedonic equation. This indicates that individuals care about their local neighborhood, i.e. the general upkeep of their street and possibly their neighbors’ characteristics (cluster variables), a broader area such as the school district and/or the town (tract variables) that account for school quality and crime rates, and the particular amenities found in their MSA.

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File URL: ftp://ftp2.census.gov/ces/wp/2004/CES-WP-04-06.pdf
File Function: First version, 2004
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Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 04-06.

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Length: 41 pages
Date of creation: May 2004
Date of revision:
Handle: RePEc:cen:wpaper:04-06
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  1. 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.
  2. Yannis M. Ioannides & Jeffrey E. Zabel, 2002. "Interaction, Neighborhood Selection and Housing Demand," Discussion Papers Series, Department of Economics, Tufts University 0208, Department of Economics, Tufts University.
  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.
  4. 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.
  5. Palmquist, Raymond B., 1982. "Measuring environmental effects on property values without hedonic regressions," Journal of Urban Economics, Elsevier, vol. 11(3), pages 333-347, May.
  6. Clapp, John M. & Wang, Yazhen, 2006. "Defining neighborhood boundaries: Are census tracts obsolete?," Journal of Urban Economics, Elsevier, vol. 59(2), pages 259-284, March.
  7. 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.
  8. 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..
  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.
  10. Mingche M. Li & H. James Brown, 1980. "Micro-Neighborhood Externalities and Hedonic Housing Prices," Land Economics, University of Wisconsin Press, vol. 56(2), pages 125-141.
  11. Murphy, Kevin M & Topel, Robert H, 2002. "Estimation and Inference in Two-Step Econometric Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 88-97, January.
  12. Schelling, Thomas C, 1969. "Models of Segregation," American Economic Review, American Economic Association, vol. 59(2), pages 488-93, May.
  13. 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.
  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.
  15. 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.
  16. Shultz, Steven D & King, David A, 2001. "The Use of Census Data for Hedonic Price Estimates of Open-Space Amenities and Land Use," The Journal of Real Estate Finance and Economics, Springer, vol. 22(2-3), pages 239-52, March-May.
  17. Yannis M. Ioannides, 1999. "Residential Neighborhood Effects," Discussion Papers Series, Department of Economics, Tufts University 9912, Department of Economics, Tufts University.
  18. Mills, Edwin S. & Simenauer, Ronald, 1996. "New Hedonic Estimates of Regional Constant Quality House Prices," Journal of Urban Economics, Elsevier, vol. 39(2), pages 209-215, March.
  19. Sieg, Holger & Smith, V. Kerry & Banzhaf, H. Spencer & Walsh, Randy, 2002. "Interjurisdictional housing prices in locational equilibrium," Journal of Urban Economics, Elsevier, vol. 52(1), pages 131-153, July.
  20. 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.
  21. Anna Hardman & Yannis Ioannides, 2004. "Neighbors’ Income Distribution: Economic Segregation and Mixing in US Urban Neighborhoods," Discussion Papers Series, Department of Economics, Tufts University 0421, Department of Economics, Tufts University.
  22. Allen C. Goodman, 1977. "A Comparison of Block Group and Census Tract Data in a Hedonic Housing Price Model," Land Economics, University of Wisconsin Press, vol. 53(4), pages 483-487.
  23. Strange, William, 1992. "Overlapping neighborhoods and housing externalities," Journal of Urban Economics, Elsevier, vol. 32(1), pages 17-39, July.
  24. Myers, Caitlin Knowles, 2004. "Discrimination and neighborhood effects: understanding racial differentials in US housing prices," Journal of Urban Economics, Elsevier, vol. 56(2), pages 279-302, September.
  25. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416.
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