Measuring price dynamics in residential property markets
Hollans, Lester Harris
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Early buyers of single family residences in newly developed subdivisions assume a greater level of risk in choosing to purchase a home in a subdivision, where the market has not sufficiently been established. This risk stems from various forms of uncertainty regarding the maintenance of development standards and other negative externalities inherent in purchasing in the early stages of the development cycle. As such, these buyers may require compensation, in the form of lower prices to encourage a transaction. This paper measures the pricing structure of single-family residences in newly developed subdivisions through the phases of the sellout process. The second section of this work seeks a refined definition of neighborhoods. Housing markets are generally defined as groups of complementary properties, which work together to form a single economic unit, this unit providing various bundles of services to the consumer. Housing markets generally contain high levels of homogeneity within market while maintaining maximum heterogeneity between different markets. This paper seeks to define neighborhoods in terms of the value of these services as reflected in house prices. I measure the effectiveness of various boundary definitions for residential neighborhoods using an a priori submarket identification with further levels of disaggregation being performed using a k-means clustering technique. The efficiency of these definitions is tested using price prediction accuracy as a tool in identifying an improved method of submarket identification. My paper illustrates the superiority of definitions based upon school attendance districts as opposed to those based upon political/municipal boundaries. The data set I use contains single-family residential sales transactions between the years 1977 and 2002 for the incorporated areas of Miami-Dade County, Florida.