Competition and home prices: measuring the supply effect
Hedonic models measure the impact that various physical characteristics have on the sale price of a home. Due to data limitations, however, these models usually do not take into account the number of homes on the market at the time the subject home sells. Theoretically, the number of competitors should negatively impact the sale price of a subject property. At the same time, increases in expected sale price may cause more sellers to offer their homes for sale, creating a reverse causation problem. The goal of this research is to address this endogeneity problem in order to measure how the number of competitors affects the sale prices of homes in a mid-sized city in the Midwest United States. I resolve the endogeneity problem by finding instruments that are related to supply and not demand and use them to execute a two-stage least squares regression. After controlling for this endogeneity, I estimate that a 1% increase in the number of competitors lowers the sale price by approximately 0.06 %.
Thesis (M.A.)--Wichita State University, W. Frank Barton School of Business, Dept. of Economics