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Housing Consumption and Prices in a Unified Metropolitan Market with Heterogeneous Preferences

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  • Luis Eduardo Quintero

Abstract

We provide a new method for estimating hedonic functions in a metropolitan housing market for both rental rates and real estate asset prices. First, our method treats housing quality as unobserved by the econometrician. Second, it deals with the problem that implicit rental rates for owner-occupied housing are latent. Using a non-parametric matching approach, we show how to identify the rent-to-value ratio as a function of latent quality. Third, the paper provides a new estimation method for a generalization that incorporates heterogeneity in preferences. To our knowledge, this is the first paper that incorporates these in a unified treatment of metropolitan housing markets. We estimate the model with types obtained by using clustering techniques to learn categorization of households into types based on age and number of children. We obtain the robust result that the presence of children lowers the preference for housing quality and increases the welfare sensitivity to changes in income and price. The opposite happens as households age. Finally, we also estimated a joint model for the NYC and Chicago metropolitan areas to compare quality markets, and find that a compensating variation of approximately 20\% of the annual income would be required to induce the median household in Chicago to move to NYC. Finally, we study the recent housing market crisis in the U.S., and obtain findings consistent with the view that changes in both credit market conditions and investor expectations were key contributors to the run-up in housing values.

Suggested Citation

  • Luis Eduardo Quintero, 2014. "Housing Consumption and Prices in a Unified Metropolitan Market with Heterogeneous Preferences," 2014 Papers pqu53, Job Market Papers.
  • Handle: RePEc:jmp:jm2014:pqu53
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    References listed on IDEAS

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    1. Nechyba, Thomas J, 1997. "Local Property and State Income Taxes: The Role of Interjurisdictional Competition and Collusion," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 351-384, April.
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    3. James J. Heckman & Rosa L. Matzkin & Lars Nesheim, 2010. "Nonparametric Identification and Estimation of Nonadditive Hedonic Models," Econometrica, Econometric Society, vol. 78(5), pages 1569-1591, September.
    4. Philippe Bracke, 2015. "House Prices and Rents: Microevidence from a Matched Data Set in Central London," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(2), pages 403-431, June.
    5. Philippe Bracke, 2013. "House Prices and Rents: Micro Evidence from a Matched Dataset in Central London_x0003_," ERSA conference papers ersa13p112, European Regional Science Association.
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    9. 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.
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    16. repec:dau:papers:123456789/6486 is not listed on IDEAS
    17. 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.
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    More about this item

    JEL classification:

    • R2 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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