Neighborhood Heterogeneity: Implication to the Weighted Repeat Sales Method

Does the degree of neighborhood heterogeneity, in and of itself, contribute to the cross-sectional price variations beyond that attributable to differences in physical characteristics within the neighborhood? This study presents theoretical and empirical investigations to confirm that the degree of property heterogeneity within the neighborhood can explain a significant portion of the cross-sectional price variations. Using the MLS data in south Florida, we conduct a series of regression analyses that yield consistent and robust results indicating that (1) neighborhood heterogeneity, whether structural or demographic, exhibits significant explanatory power to the pricing variations; (2) the market volatility, in contrast, only explains a small portion of the pricing variation, which confirms the finding of Case and Shiller; and (3) market liquidity, though not a neighborhood heterogeneity measure, does have a significant and negative effect on the pricing variation, suggesting that the availability of comparable sales can reduce pricing variation. These findings can potentially lead to an improvement over the widely-used Weighted Repeat Sales (WRS) method for constructing home price indices.