The US Housing Market: Asset Pricing Forecasts Using Time Varying Coefficients

The aging of a housing structure not only leads to depreciation but also increases the possibility of redevelopment. If redevelopment accompanies an increase in structural density in order to accommodate the increased demand for housing, it provides large capital gains to the existing owners. In thi...

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Bibliographic Details
Published in:The journal of real estate finance and economics 2005-02, Vol.30 (1), p.33-53
Main Authors: Guirguis, Hany S, Giannikos, Christos I, Anderson, Randy I
Format: Article
Language:English
Subjects:
Asset valuation
Econometric models
Economic analysis
Financial economics
Forecasts
Housing
Hypotheses
Mathematical methods
Modelling
Pricing
Property values
Real estate market
Studies
Transaction costs
U.S.A
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Summary:The aging of a housing structure not only leads to depreciation but also increases the possibility of redevelopment. If redevelopment accompanies an increase in structural density in order to accommodate the increased demand for housing, it provides large capital gains to the existing owners. In this case, expectations of redevelopment in the near future and the eventual announcement of redevelopment plans can have a strong positive impact on the current price of housing. We test this hypothesis using a hedonic pricing model designed to decompose the age effects into depreciation effect and redevelopment effect. Based on 3,474 observations on apartments in Seoul in 2001, estimation results confirm our hypothesis. While the depreciation effect dominates the redevelopment effect until 15 to 19 years of age, depending on the specification, the redevelopment effect eventually dominates the depreciation effect thereafter, causing the apartment price to increase. At 27 years of age, the apartment price decreases by as much as 45?53 percent of the initial value, due to depreciation. However, the redevelopment effect increases the price by as much as 28?32 percent, driving the price up to 76?87 percent of the original value.
ISSN:0895-5638
1573-045X
DOI:10.1007/s11146-004-4830-z