How the Housing Crisis Changed the Pricing Function for Residential Buyers

Abstract

This study uses econometric techniques to search for discrete structural changes in residential pricing equations. The study looks specifically at house pricing during the recent financial crisis to search for significant breaks in coefficients that indicate a functional change in the data. While the effects of the crisis are often captured by using a single dummy variable, this paper considers the possibility that the crisis not only reduced prices but may have affected the impact of the explanatory variables in the model. The absence of such a break, on the other hand, would suggest that variables affecting the pricing function are stable over a variety of market conditions. The results of this study suggest that a structural break does exist, and that a dummy variable is insufficient to capture the impact of this break. The methodologies employed in this study can also be used to look for less obvious structural breaks that may exist in a housing data set. The results should be of interest to buyers and sellers of residential properties, agents specializing in residential properties, and researchers looking to better capture the impact of various events on housing prices.