Selectivity, Quality Adjustment and Mean Reversion in the Measurement of House Values

Posted: 25 Oct 2003

See all articles by Min Hwang

Min Hwang

George Washington University - Department of Finance

John M. Quigley

University of California, Berkeley, College of Letters & Science, Department of Economics (Deceased); University of California, Berkeley, Haas School of Business, Real Estate Group (Deceased)

Abstract

This paper develops a model of price formation in the housing market which accounts for the non-random selection of those dwellings sold on the market from the stock of existing houses. The model we develop also accounts for changes in the quality of dwellings themselves and tests for mean reversion in individual house prices. The model is applied to a unique body of data representing all dwellings sold in Sweden's largest metropolitan area during the period 1982-1999. The analysis compares house price indices that account for selectivity, quality change and mean reversion with the conventional repeat sales models used to describe the course of metropolitan housing prices. We find that the repeat sales method yields systematically large biased estimates of the value of the housing stock. Our comparison suggests that the more general approach to the estimation of housing prices or housing wealth yields substantially improved estimates of the course of housing prices and housing wealth.

Keywords: house price index, selectivity, mean reversion, hybrid model

JEL Classification: C43, G12, R31

Suggested Citation

Hwang, Min and Quigley, John M., Selectivity, Quality Adjustment and Mean Reversion in the Measurement of House Values. Journal of Real Estate Finance and Economics, Vol. 28, No. 2. Available at SSRN: https://ssrn.com/abstract=436942

Min Hwang

George Washington University - Department of Finance ( email )

2023 G Street
Washington, DC 20052
United States

John M. Quigley (Contact Author)

University of California, Berkeley, College of Letters & Science, Department of Economics (Deceased) ( email )

Berkeley, CA 94720-3880
United States
510-643-7411 (Phone)
510-643-7357 (Fax)

University of California, Berkeley, Haas School of Business, Real Estate Group (Deceased) ( email )

Berkeley, CA 94720-1900
United States

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