Residential Hedonic Models: A Rational Expectations Approach to Age Effects

Abstract

This paper develops a rational expectations framework for interpreting the coefficient on age in a standard hedonic model. The model demonstrates that there are two components to the age coefficient; a pure cross-sectional depreciation component and a demand-side component that changes over time. We also show that a constant quality price index with age constant can be estimated using any repeat sales database that contains year built (or property age). When Fairfax County data are fitted to the model, the time series of age coefficients is non-stationary: They change from negative in the early 1980s to positive in the late 1980s; we infer that the demand-side component dominated in the latter period.

JEL Classification: R21, R31