econ 135 fall08 lecture9

econ 135 fall08 lecture9 - Urban Economics Lecture 9...

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1 Urban Economics -- Lecture 9 Housing Why is housing different from other commodities? Housing is durable. It lasts for 100+ years--more if well- maintained. Because housing is durable, the housing stock consists mainly of already-built houses. Only about 2-3% of the housing stock is new each year. Existing houses are difficult to change. s Moving is costly. For renters, must put down a deposit on a new apt, pay a mover to move your furniture. For homeowners, must also pay a real estate agent 6 -7% of value to sell the house, obtain a new mortgage, and possibly pay points on a new mortgage.
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2 s Housing is immobile. So when you buy a house, you also buy the neighborhood, the schools, the local property tax rate, the air quality level, distance from the CBD, and other local characteristics (is shopping nearby, is there a polluting factory nearby, etc.). s Can’t hedge your bets: can’t buy half a house in one place and half a house in another. (If you like both apples and oranges, you can split your consumption.)
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3 How to explain housing value --- The hedonic approach Get data on house values at time of sale, characteristics of houses (size, number of bathrooms, age of the roof, size of the lot, if A/C, if swimming pool), quality of the neighborhood (quality of neighboring houses, local air quality, local school quality, if any undesireable land uses are nearby), accessibility (miles from CBD). Estimate a regression: V = a + b(size) + c(number of bathrooms) + d(air quality) + . ... + error term Each coefficient gives the increase/decrease in house value when the house has one more bathroom, one additional year of age on the roof, has A/C, has school test scores are one point higher, etc. Must be careful of including overlapping variables: if you include just number of bedrooms, then the coefficient measures the additional value of one extra room, i.e., a larger house. But if you include both number of bedrooms and square footage of the house, then the coefficient of number of bedrooms measures the additional value of one
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4 extra bedroom when the square footage of the house remains the same (more walls). Hedonic study of housing in Boston in 1989: Average housing value: $199,700 Coefficient Mean value Constant 61,508 Number of bathrooms 50,678 1.6 Number of bedrooms 13,935 3.2 If garage 21,681 .63 Age -60 27 If attached -3880 .014 If poor quality -3425 .024 If bad area -6175 .069 If central city -4997 .036
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5 Results: an additional bedroom adds $14,000. an additional bathroom adds $50,600—this is probably measuring the effect of a larger house generally, since there is no variable measuring size of house. An additional year of age subtracts $60. If central city, then value is $5,000 lower.
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econ 135 fall08 lecture9 - Urban Economics Lecture 9...

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