Coldwell Banker Premier Realty

A new price index


Hedonic Index
Posted: December 02, 2010 by John McClelland

FNC,Inc has developed and published a new home price index using a hedonic, rather than repeat sale method. Basically, the hedonic approach uses price as the dependent variable and the characteristics of the homes sold as regressors (ie, home size, age, location, etc.). Essentially this is taking a partial derivative of price with respect to each variable, or characteristic of homes.

By employing this method, FNC,Inc hopes to overcome some of the problems associated with repeat sales. One being a sample selection issue: The repeat sale type index can be prone to over or under statement due to the changing mix of homes sold in each sample period. This issue is more present in median price indices but does exist in repeat sales as well. FNC,Inc cites the example of the near total collapse of the jumbo loan market. One went from having large home sales in the index to almost none at all.

Another issue with repeat sales indices is the small sample size of homes that is recorded in some areas. Repeat sale indices by nature must ignore new homes or homes that have undergone some changes. Smaller samples can result in volatility. These issues are largely resolved by hedonic indices.

In real estate markets, it is difficult to assess valuations due to infrequent trading, no central exchange and heterogeneous properties. Another index is always welcome and I wish FNC, Inc great success.

Note the formation of the Las Vegas index below.


Source: FNC,Inc

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