The Journal of Real Estate Finance and Economics
Volume 14, Issue 1, Article 3 (Abstract)
Title:	The Construction of Residential Housing Price Indexes: A Comparison of Repeat Sales, Hedonic Regression, and Hybrid Approaches
Author:	Richard A. Meese and Nancy E. Wallace
Abstract:	The paper examines a number of hypotheses that underpin the repeat sales and hedonic approaches to the construction of housing price indexes, as well as the practical problems associated with the implementation of either approach. We also examine a hybrid procedure that combines elements of both the repeat sales and hedonic regression techniques. For our sample of individual home sales in Oakland and Fremont California over an eighteen year period, repeat sales methods are subject to sample selection bias, the maintained assumption of time constancy of implicit prices of housing attributes is violated, the repeat sales estimator is extremely sensitive to influential observations, and the usual method to correct for heteroskedasticity in repeat sale housing returns is inappropriate in our sample. Hedonic techniques are better suited to contend with index number problems per se, as they can accommodate changing attribute prices over time. They also appear to give rise to more reliable estimates of price indexes, as unusual observations have less effect on estimated price indexes. Drawbacks of the hedonic approach include the usual concern with omitted attributes, and their effect on the estimated price index.
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