What Can We Learn from Hedonic Models When Housing Markets are Dominated by Foreclosures?
Posted: 11 Oct 2013
Date Written: June 2013
Hedonic property value models have been frequently used to value environmental amenities because markets for these goods usually do not exist. Typically, researchers cite Rosen’s (1974) seminal work, which allows one to interpret functions of the hedonic regression coefficients as the marginal willingness to pay for the environmental good. A key assumption needed for the Rosen result to hold is market equilibrium. Recent years have witnessed extreme circumstances — such as wild swings in housing prices, high levels of mortgage default, and, most significantly, high levels of foreclosure — in which this assumption is unlikely to hold. In this article, we address the issue of how we interpret the coefficient estimates for environmental goods in hedonic property value models when markets are dominated by foreclosures. We then focus on housing market conditions when interpreting the hedonic literature on (airport) noise, Superfund sites, air quality, and flood risk.
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