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Hedonic regression
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<h2 id="hedonic-models-and-real-estate-valuation">Hedonic models and real estate valuation</h2> <p>In real estate economics, Hedonic regression is used to adjust for the issues associated with researching a good that is as <a href="/facts/Heterogeneous/y84KQJxl">heterogeneous</a>, such as buildings. Because individual buildings are so different, it is difficult to estimate the demand for buildings generically. Instead, it is assumed that a house can be decomposed into characteristics such as its amount of bedrooms, the size of its lot, or its distance from the city center. A hedonic regression equation treats these attributes (or bundles of attributes) separately, and estimates prices (in the case of an additive model) or elasticity (in the case of a log model) for each of them. This information can be used to construct a price index that can be used to compare the price of housing in different cities or to do time series analysis. As with CPI calculations, Hedonic pricing can be used to: </p> <ul><li>Correct for quality changes in constructing a housing price index.</li> <li>Assess the value of a property, in the absence of specific market transaction data.</li> <li>To analyze the demand for various housing characteristics, as well as housing demand in general.</li></ul> <p>Due to the macro-oriented nature of hedonic models, with regard to their more general approach to assessment when compared to the more exacting and specific (albeit less contextualized) approach of individual assessment, when used for mass appraisal, the <a href="/facts/Uniform_Standards_of_Professional_Appraisal_Practice/82WEWD5f">Uniform Standards of Professional Appraisal Practice</a>, or USPAP, has established mass appraisal standards to govern the use of hedonic regressions and other automated valuation models when used for <a href="/facts/Real_estate_appraisal/2MvYqJaa">real estate appraisal</a>.<a class="footnote-ref" id="fnref:1" href="#fn:1"><sup>1</sup></a> </p> <h2 id="hedonic-models-outside-of-real-estate-valuation">Hedonic models outside of real estate valuation</h2> <p>Aside from its use in housing market estimations, Hedonic regression has also seen use as a means for testing assumptions in spatial economics, and is commonly applied to operations in tax assessment, litigation, academic studies, and other mass appraisal projects. </p><p>Appraisal methodology more or less treats hedonic regression as a more statistically robust form of the <a href="/facts/Sales_comparison_approach/zBRl6TRd">sales comparison approach</a>,<a class="footnote-ref" id="fnref:2" href="#fn:2"><sup>2</sup></a> making it a popular means for assessment in any market or economic sector in which valuation between two categorically similar (or same) goods (such as two different kitchenware sets) can differ greatly based on additional factors (such as whether the pots and pans made of copper, cast iron, stone, etc, or what non-stick coating, if any, was applied) or constituent goods (including a steamer basket for one of the pots or having the largest pot be a Dutch oven) that strongly influence or semi-exclusively determine the unified good's value. </p> <h2 id="history">History</h2> <p>Hedonic modeling was first published in the 1920s as a method for valuing the demand and the price of farm land. However, the history of hedonic regression traces its roots to Church (1939),<a class="footnote-ref" id="fnref:3" href="#fn:3"><sup>3</sup></a> which was an analysis of automobile prices and automobile features.<a class="footnote-ref" id="fnref:4" href="#fn:4"><sup>4</sup></a> Hedonic regression is presently used for creating the <a href="/facts/Consumer_price_index/cCdp5jkt">Consumer Price Index</a> (CPI).<a class="footnote-ref" id="fnref:5" href="#fn:5"><sup>5</sup></a> </p> <h2 id="criticisms-of-hedonic-models">Criticisms of hedonic models</h2> <p>Some commentators, including <a href="/facts/Austrian_economists/y2qvtPD7">Austrian economists</a>, have criticized the US government's use of hedonic regression in computing its CPI, fearing it can be used to mask the "true" inflation rate and thus lower the interest it must pay on <a href="/facts/Treasury_Inflation-Protected_Securities/ggwu3txu">Treasury Inflation-Protected Securities</a> (TIPS) and <a href="/facts/Social_Security_(United_States)/aXUHgqLx">Social Security</a> cost of living adjustments.<a class="footnote-ref" id="fnref:6" href="#fn:6"><sup>6</sup></a> </p><p>The same use of hedonic models when analyzing consumer prices in other countries, however, has shown that non-hedonic methods may <i>themselves</i> misstate inflation over time by failing to take quality changes into account.<a class="footnote-ref" id="fnref:7" href="#fn:7"><sup>7</sup></a> </p> <h2 id="see-also">See also</h2> <ul><li><a href="/facts/Hedonic_index/w3ogqUlC">Hedonic index</a></li> <li><a href="/facts/Compensating_differential/3B2lHHqS">Compensating differential</a></li> <li><a href="/facts/Kelvin_Lancaster/ulEncHfu">Kelvin Lancaster</a></li> <li><a href="/facts/Dynamic_pricing/PD4kjHAI">Dynamic pricing</a></li></ul> <h2 id="further-reading">Further reading</h2> <ul><li>Liegey, Paul. <a href="http://www.bls.gov/cpi/cpidryer.htm">"Hedonic Quality Adjustment Methods"</a>. <i>Bureau of Labor Statistics, US Department of Labor</i>.</li> <li>Rosen, S. (1974). "Hedonic prices and implicit markets: product differentiation in pure competition". <i><a href="/facts/Journal_of_Political_Economy/boJcgYuj">Journal of Political Economy</a></i>. 82 (1): 34–55. <a href="/facts/CiteSeerX_(identifier)/SceDmd3c">CiteSeerX</a> <a href="https://citeseerx.ist.psu.edu/viewdoc/summary?doi=10.1.1.517.5639">10.1.1.517.5639</a>. <a href="/facts/Doi_(identifier)/muM9Etpq">doi</a>:<a href="https://doi.org/10.1086%2F260169">10.1086/260169</a>. <a href="/facts/JSTOR_(identifier)/YTeVmaJ7">JSTOR</a> <a href="https://www.jstor.org/stable/1830899">1830899</a>. <a href="/facts/S2CID_(identifier)/ldJsHa2Y">S2CID</a> <a href="https://api.semanticscholar.org/CorpusID:39481486">39481486</a>.</li> <li>Nelson, J. (1978). "Residential choice, hedonic prices, and the demand for urban air quality". <i>Journal of Urban Economics</i>. 5 (3): 357–369. <a href="/facts/Doi_(identifier)/muM9Etpq">doi</a>:<a href="https://doi.org/10.1016%2F0094-1190%2878%2990016-5">10.1016/0094-1190(78)90016-5</a>.</li> <li><a href="http://biblio.repec.org/entry/tbbb.html">Curated bibliography</a> at <a href="/facts/Research_papers_in_economics/uXECwUyI">IDEAS/RePEc</a></li></ul> <h2 id="references">References</h2> <ol> <li id="fn:1"><p>Hedonic Regression Models Ben J. Sopranzetti Rutgers, The State University of New Jersey Article · August 2015 DOI: 10.1007/978-1-4614-7750-1_78 <a href="#fnref:1" class="footnote-back-ref">↩</a></p></li> <li id="fn:2"><p>John A. Kilpatrick, Real Estate Issues in Class Certification Archived 2007-10-10 at the Wayback Machine <a href="/w/index.php?title=John_A._Kilpatrick&action=edit&redlink=1" target="_blank">/w/index.php?title=John_A._Kilpatrick&action=edit&redlink=1</a> <a href="#fnref:2" class="footnote-back-ref">↩</a></p></li> <li id="fn:3"><p>A. T. Court, Hedonic price indexes with automotive examples, in ‘‘The Dynamics of Automobile Demand,’’ General Motors, New York, pp. 98]119 1939 . <a href="#fnref:3" class="footnote-back-ref">↩</a></p></li> <li id="fn:4"><p>"Andrew Court and the Invention of Hedonic Price Analysis" (PDF). <a href="https://allengoodman.wayne.edu/Research/PUBS/Deep/Court-JUE.pdf" target="_blank">https://allengoodman.wayne.edu/Research/PUBS/Deep/Court-JUE.pdf</a> <a href="#fnref:4" class="footnote-back-ref">↩</a></p></li> <li id="fn:5"><p>Hedonic Regression Models Article · August 2015 Ben J. Sopranzetti Rutgers, The State University of New Jersey DOI: 10.1007/978-1-4614-7750-1_78 <a href="#fnref:5" class="footnote-back-ref">↩</a></p></li> <li id="fn:6"><p>See, for example, Lippe, Peter von der (2001). "Some Conservative Comments on Hedonic Methods" (PDF). <a href="http://www.von-der-lippe.org/dokumente/hedon-vdl.pdf" target="_blank">http://www.von-der-lippe.org/dokumente/hedon-vdl.pdf</a> <a href="#fnref:6" class="footnote-back-ref">↩</a></p></li> <li id="fn:7"><p>See, for example, Reis, Hugo J.; Silva, J. M. C. Santos (2006). "Hedonic Price Indexes for New Passenger Cars in Portugal (1997–2003)" (PDF). Economic Modelling. 23 (6): 890–906. doi:10.1016/j.econmod.2006.04.003. hdl:10400.5/24358. <a href="https://www.bportugal.pt/sites/default/files/anexos/papers/wp200210.pdf" target="_blank">https://www.bportugal.pt/sites/default/files/anexos/papers/wp200210.pdf</a> <a href="#fnref:7" class="footnote-back-ref">↩</a></p></li> </ol>