Housing price functions and ownership capitalization rates

Abstract

In this paper we examine the problem of consistently estimating capitalization rates and hedonic housing prices. We specify a hedonic pricing model for housing that combines owner-occupied and rental unit samples in a manner yielding hedonic prices not subject to selection bias and capitalization rates which vary with the age and family income of the residents. We use the 1982 Annual Housing Survey (AHS) for metropolitan Philadelphia to obtain parameter estimates for this model. Our findings indicate that selectivity bias is present in price functions utilizing only owner-occupied or rental unit samples. Our results further indicate that the mean annual capitalization rate for owner-occupied units is approximately 10%. However, the capitalization rate is non-monotonically related to both age of the head and family income.