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Housing Market Segmentation: A Finite Mixture Approach

Author

Listed:
  • Steven C. Bourassa

    (University of Washington)

  • Martijn I. Dröes

    (University of Amsterdam
    Amsterdam School of Real Estate (ASRE))

  • Martin Hoesli

    (University of Geneva
    University of Aberdeen Business School, University of Aberdeen)

Abstract

This paper investigates the usefulness of adding a discrete choice model to the hedonic model via a finite mixture approach. Our approach leads to different hedonic models for different housing market segments based on household information. As such, the proposed method goes beyond measuring the average price of housing attributes. As a case study, we estimate the finite mixture model for the Miami and Louisville metropolitan areas using information on race, ethnicity, and income from the American Housing Survey. We find that the model outperforms the standard hedonic model or a model with linear interaction terms between demographics and housing characteristics. Moreover, market segmentation is based on a complex combination of race, ethnicity, and income. For Louisville, Black households need 2.5 times higher income than White households to advance to a higher market segment and even at high incomes tend to occupy their own segment. For Miami, low-income, non-Hispanic households live in their own segment even if occupying the same dwelling size as households in other segments.

Suggested Citation

  • Steven C. Bourassa & Martijn I. Dröes & Martin Hoesli, 2024. "Housing Market Segmentation: A Finite Mixture Approach," De Economist, Springer, vol. 172(4), pages 291-337, December.
  • Handle: RePEc:kap:decono:v:172:y:2024:i:4:d:10.1007_s10645-024-09446-2
    DOI: 10.1007/s10645-024-09446-2
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    More about this item

    Keywords

    Housing market segmentation; Hedonic model; Finite mixture model;
    All these keywords.

    JEL classification:

    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies

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