Hedonic pricing models and residual house price volatility

Abstract

This paper develops a simple method for measuring the residual house price volatility, namely, the house price variation which cannot be attributed to the heterogeneous nature of real estate goods. By creating a quality index of housing characteristics, the method is able to detect “anomalous” situations, in which the sale price does not reflect (in whole or in part) the attributes or qualities that are possessed by the property. In standard market situations, indeed, a higher (lower) price should identify a better (worse) set of housing characteristics. Therefore, we use the hedonic approach by considering that distinction. Furthermore, we estimate a hedonic model where the quality index of housing characteristics is used instead of the housing characteristics. Eventually, this method refines the estimates of marginal prices of housing characteristics and also provides an estimate of the residual house price volatility.