Marginal Revolution Continues To Be On Fire …

… with such thought-provoking and innovative posts as this from Tyler Cowen on the market value of different aspects of real estate. Not surprisingly, bathrooms add considerably to the market value of the property. Tyler’s got all the links to the academic literature he’s discussing, so I won’t reproduce them here.

Interestingly, we have been in the market for a house for a couple of years, and I had the same response on Saturday when our broker came over with a set of comparables he had pulled for a house we were considering. My first reaction was not “hey, let’s see if this house is worth the money”, but rather “wow, if Doug can pull these data in such a short amount of time, imagine the questions you could answer with the dataset you could build!” Then I started thinking about various econometric specifications, what instruments you could use to get around the simultaneity bias in some of the variables, etc. Then my husband (figuratively) threw a glass of water at me and I regained my house-hunting senses.

But real estate data are a potentially tremendous source of information on some very important customer preferences.

See also Tyler’s entry on the incentive problems in trying to increase RSVP rates, and Alex Tabarrok’s post on organ donation.

Alex will also be discussing the organ shortage in a Capitol Hill Campus luncheon this coming Friday. So if you’re a Congressional staffer and you’re interested in the economics of organ donation, check it out.

3 thoughts on “Marginal Revolution Continues To Be On Fire …

  1. I think the analysis by Dr.’s Sirmans and MacPherson suffers from at least four problems;

    1. Generalizations about the Philadelphia MLS are not necessarily applicable to other jurisdictions as architectural styles, code requirements, land availability, personal wealth, housing price distributions etc. vary widely across the country. Moreover, the data has been acquired over too long a period (7 years). Time is of the essence in real estate transactions.

    2. MLS data is frequently unreliable or incomplete (read the disclaimer in any Realtor’s competitive market analysis) hence the possibility that the data set is corrupted to some degree or other.

    3. The housing elements expressed as variables in the analysis (square footage, HVAC types, wood floors, electric cooking, gas cooking etc.) are themselves inadequately detailed to accurately describe value to a potential buyer. Obviously not all wood floors, kitchens, etc. are alike and certainly the value that a potential buyer places in them will vary as well. This is really a problem of the way multiple listing services present data to the consumer. The goal is to market the property rather than rate it by some objective standard.

    4. Although both researchers give lip service to location and aesthetics, studies by the NAHB indicate that these two items weigh heaviest in the minds of potential buyers. Aesthetics of course cannot be easily quantified and the MLS data that the study is based upon is insufficiently detailed to permit analysis with regards to individual neighborhoods. Consequently the analysis is over-broad and the itemized coefficients are of little value to an individual builder or buyer.

  2. Lynne, you’ve been trying to buy a house FOR A COUPLE OF YEARS?!?

    What the heck is the problem?

    Prices in my neck of the cosmos (Northwest ‘burbs) have been going up like 15% a year or so since I bought in 1999. I suspect that the north shore ‘burbs have been even hotter.

    With those kind of price increases, you SHOULD have bought LONG AGO.

    Your problem now is that you are buying at the top of the market. I seriously doubt that housing price increases going forward will be anywhere near as much as the recent past.

    Of course, I said the same thing in 2001. And 2002. And 2003. And I was wrong every year.

    So what’s the ROI of buying a fixer upper, knocking the thing down, and building a McMansion in its place? I love knockdowns!

  3. Top of the market in the city, and in my ‘hood especially, was two years ago. Things have been slow in Lakeview in the 3br/2ba single family market.

    The last two we tried to buy:

    1. August 2002: gorgeous 1921 Chicago bungalow with original wood trim interior. Two blocks from current abode. Termites.

    2. October 2003: well-renovated 1894 worker’s cottage, one block from current abode. Oak built ins. Another offer came in same day, their realtor didn’t play it totally straight and we didn’t behave as strategically as we should have.

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