What Do Hedonic House Price Estimates Tell Us When Capitalization Rates Vary?

47 Pages Posted: 1 Jun 2023

See all articles by Paul E. Carrillo

Paul E. Carrillo

George Washington University - Department of Economics

Anthony M. Yezer

George Washington University - Department of Economics

Nate Harris

The George Washington University

Abstract

This paper demonstrates theoretically and empirically the conditions under which estimated implicit prices from hedonic equations using house value reflect implicit willingness to pay for housing attributes. Implicit prices obtained from rental hedonics, consistent with theory, reveal the willingness to pay for current housing services. Therefore hedonic equations relating asset prices to current characteristics only reveal willingness to pay for current structure and neighborhood services if cap rates (rent to value ratios) are constant. Several new results demonstrate how theory can be used to identify situations in which cap rates are unlikely to vary. In cases where cap rates are likely to vary, methods for determining the bias inherent in using asset rather than rental prices are developed. Rules and tests for situations where cap rates are constant are developed and practical examples demonstrated. Fortunately, application of economic theory facilitates finding cases where variation in cap rates creates empirical problems and identifying ways to avoid potential bias in using house value hedonics.

Keywords: real estate, Amenity valuation, Rental hedonics

Suggested Citation

Carrillo, Paul E. and Yezer, Anthony M. and Harris, Nate, What Do Hedonic House Price Estimates Tell Us When Capitalization Rates Vary?. Available at SSRN: https://ssrn.com/abstract=4466310 or http://dx.doi.org/10.2139/ssrn.4466310

Paul E. Carrillo (Contact Author)

George Washington University - Department of Economics ( email )

Monroe Hall Suite 340
2115 G Street NW
Washington, DC 20052
United States

Anthony M. Yezer

George Washington University - Department of Economics ( email )

Monroe Hall, Suite 340
2115 G Street, NW
Washington, DC 20052
United States

Nate Harris

The George Washington University ( email )

Washington, DC

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