Estimating House Price Indexes in the Presence of Seller Reservation Prices

William Goetzmann and Liang Peng

The Review of Economics and Statistics, 2006, vol. 88, issue 1, 100-112

Abstract: We analyze a bias in transaction-based price indexes due to the presence of seller reservation prices. We develop a model in which the ratio of sellers' reservation prices to the market value affects trading volume and biases of observed transaction prices: when trading volume decreases (increases), index returns are estimated with an upward (downward) bias. We propose a new econometric procedure to mitigate the bias, and use simulations to demonstrate the effectiveness of the procedure. We construct a reserve-conditional unbiased index for the Los Angeles housing market, which substantially differs from a traditional repeat sale index. © 2006 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Date: 2006
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