A Comprehensive Spatiotemporal Framework for Hedonic Pricing: Integrating the Comparable Sales Approach and Reducing Omitted Variable Bias

Posted: 25 Jun 2019 Last revised: 27 Aug 2020

See all articles by Sotirios Thanos

Sotirios Thanos

University of Manchester - School of Environment and Development

Jean Dubé

École supérieure d'aménagement du territoire et de développement régional (ÉSAD)

Diègo Legros

Université de Bourgogne - Laboratoire d'Economie de Dijon (LEDI)

Date Written: May 26, 2019

Abstract

This paper develops a theoretical and methodological framework that integrates Hedonic Pricing (HP), grid comparable sales approach (CSA), and nearest neighbors into a general spatiotemporal specification. By explicitly providing a theoretical justification for introducing spatial (or spatiotemporal) econometrics to HP, this approach is not only relevant to house price forecasting and automated valuation models (AVM) but also to valuing environmental goods capitalized in housing and to all other fields employing house pricing models. The resulting econometric CSA and spatiotemporal Durbin models provide higher prediction accuracy and reliability to alternatives by reducing the spatially-delineated omitted variable bias (OVB) common in HP. Spatiotemporal autoregressive and error models are also derived, providing specific conditions, under which their application can be justified. Our analysis reinforces the common real estate practice of selecting a small number of comparables in grid CSA and challenges AVM approaches, in which hundreds or thousands of comparables are introduced.

Keywords: Comparable Sales, Hedonic Pricing, Spatial Econometrics, Automated Valuation Models (AVM), Nearest Neighbors, Spatiotemporal Models, STAR

JEL Classification: D62, C21, C40, Q51, R10, R21, R31

Suggested Citation

Thanos, Sotirios and Dubé, Jean and Legros, Diègo, A Comprehensive Spatiotemporal Framework for Hedonic Pricing: Integrating the Comparable Sales Approach and Reducing Omitted Variable Bias (May 26, 2019). Available at SSRN: https://ssrn.com/abstract=3394549 or http://dx.doi.org/10.2139/ssrn.3394549

Sotirios Thanos (Contact Author)

University of Manchester - School of Environment and Development ( email )

Manchester
United Kingdom

Jean Dubé

École supérieure d'aménagement du territoire et de développement régional (ÉSAD) ( email )

2325 allée des Bibliothèques
Pavillon Félix-Antoine-Savard
Québec, QC G1K 9E5
Canada

Diègo Legros

Université de Bourgogne - Laboratoire d'Economie de Dijon (LEDI) ( email )

2 boulevard Gabriel
Dijon, 24100
France

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