Predicting owner-occupied housing values using machine learning: an empirical investigation of California census tracts data

Abstract

ABSTRACT In this paper, we introduce machine-learning (ML) methods to evaluate one of the key concepts of real estate analysis – the prediction of housing prices in the presence of a large number of covariates. We use several supervised ML tools that are based on regularisation methods – notably Ridge, LASSO, and Elastic Net regressions – and discuss their relative performance in comparison to conventional OLS-based methods. Our empirical results show that the supervised ML methods provide a comprehensive description of the determinants of owner-occupied housing values in the census tracts of California. We find that, compared to the familiar worlds of OLS and WLS, the Ridge, LASSO, and Elastic Net regressions provide relatively better out-of-sample predictions. Among the benefits of shrinkage-based ML methods are their ability to resolve such issues as variable selection and overfitting.