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How is the WSU Center for Real Estate's Home Price Index
Calculated?
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The WSU Wichita Home Price Index (HPI) is a
modified hedonic price index. This technique involves using multiple
regression analysis to isolate the impact of size, number of bedrooms, age,
neighborhood and other physical characteristics on the selling price of homes.
This regression measures the separate impact of each of these characteristics
on home sale prices. Thus, the results from this regression can tell us how
much, for example, an additional bedroom is worth, if the size, age,
neighborhood and other features of the home are unchanged. In economists'
jargon, this is known at the "shadow price" of a bedroom.
In addition to the physical characteristics of the homes that have sold, we
also control for the date of the sale. As a result, we are able to estimate
how much home prices have changed over time, independent of the physical
characteristics of the homes that have sold. The WSU HPI is the 3-period
moving average of these quarterly regression coefficients, rescaled so that
the value of the index is 100 for the 1st Quarter of 2000.
The WSU HPI is calculated using sales data made available by the Sedgwick
County Appraiser's Office. The analysis is limited to single-family
residential homes with a total finished living area in excess of 400 square
feet. The hedonic regression that generates the WSU HPI takes into account the
following factors:
*Age of the home;
* Total above-grade finished living area;
* Total below-grade finished living area;
* Total semi-finished living area;
* Size of lot;
* Size of attached garages;
* Size of detached garages;
* Number of bedrooms;
* Number of full bathrooms;
* Number of half bathrooms;
* Additional plumbing fixtures (to account for specialty bathrooms, etc.);
* Architectural style of the home;
* Exterior wall materials;
* Roofing materials;
* Flooring materials;
* Type of basement/foundation;
* Heating and air conditioning system type;
* Number of wood-burning fireplaces;
* Number of gas-log fireplaces;
* Whether the home has a water view;
* Whether the lot is adjacent to a water feature;
* Whether the home is on a cul-de-sac;
* Neighborhood of the home, defined by the minor MLS neighborhood zones as
established by the Wichita Area Association of REALTORS® Multiple Listing
Service.
In order to calculate an overall price index that can be interpreted in a
straightforward manner, however, the rate overall home price appreciation each
quarter is constrained to be constant across all neighborhoods within the
geography for which the index is being calculated. Thus, the WSU HPI measures
the average appreciation in home prices for an area. It is important to
recognize, therefore, any given neighborhood within the larger area of
analysis may show stronger or weaker appreciation than the index indicates.
The hedonic regression methodology used to calculate the WSU HPI is one of
several different techniques that may be employed to generate an HPI. A
popular alternative, and the method employed by the Office of Federal Housing
Enterprise Oversight (OFHEO) in their price indices, is the weighted repeat
sales method. This technique involves identifying homes that have sold more
than once, and using the percentage change in the sale prices of these homes
to measure overall housing appreciation.
Although the weighted repeat sales methodology does have some intuitive
appeal, the Center for Real Estate chose to use hedonic procedures for three
reasons. First, the MLS zones in Wichita are defined based on actual Wichita
neighborhoods. Thus, they provide excellent controls for the impact "location"
has on the price of a home, typically the weak element in hedonic price
indices. Second, the relatively short history of available data would have
limited the number of repeat sales to use in the analysis, resulting in a less
precise measure of housing appreciation. Finally, the limited number of repeat
sales would also have made it impossible to calculate sector price indices, an
important element of our analysis.
For further questions about how the WSU HPI is calculated, contact:
Dr. Stanley D. Longhofer
Director, Center for Real Estate
(316) 978-7120
realestate@wichita.edu
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