A Consistent Estimate of Land Price, Structure Price, and Depreciation Factor

Abstract

The price of a single-family house can be viewed as the bundle of the land price, and the replacement/construction cost of the structure, adjusted for depreciation. Given the difficulty in obtaining accurate estimates of each of the elements, previous researches estimate land price as the residual via subtracting the external construction cost and depreciation factor from home price. In this paper, we provide a coherent framework, in which land price index, construction cost index, and depreciation factors can be estimated from home price data, without relying on exogenous assumptions on construction cost or depreciation factors. We demonstrate our methodology by using AHS microdata to estimate land price, structure price, and depreciation indices simultaneously in six large metropolitan areas. The empirical results are consistent with previous research papers. To our knowledge, our method is the first to combine repeat sales approach and hedonic approach, and estimate all three indices simultaneously in an internal consistent fashion. This method can be utilized to provide historical estimates of residential land prices, and serve as the basis for land price forecasts.