Self-Reported Dwelling Valuations—How Accurate Are They?

Dmitri RomanovLarisa FleishmanAviad Tur-Sinai

Israel Central Bureau of Statistics

There are three kinds of estimates for a There are three kinds of estimates for a dwelling value:dwelling value:

A. Price agreed upon in a sale transactionB. Appraiser's valuationC. Owner’s self-reported valuation elicited by

surveys with a question:

“ “What do you think your home is worth? What do you think your home is worth? That is, what do you think you could get for That is, what do you think you could get for your home if you sold it now?”your home if you sold it now?”

UsesUses of s of self-reported dwelling valuationself-reported dwelling valuations

In calculating housing price index In research of the housing market and household’s

economic behavior In micro-economic empirical analysis, as an indicator of

household’s economic status and well-being

There is an immense importance to test the There is an immense importance to test the extent of accuracy of subjective dwelling extent of accuracy of subjective dwelling valuations, the differences between these valuations, the differences between these valuations and the benchmarks (appraiser’ valuations and the benchmarks (appraiser’ estimates or sale prices) and the factors estimates or sale prices) and the factors associated with these differencesassociated with these differences

Summary of previous researchSummary of previous research

The most referred studies that focused on investigation of accuracy of subjective dwelling valuations: Kain & Quigley (1972), Robin & West (1977), Follain & Malpezzi (1981), Goodman & Ittner (1992); Kiel & Zabel (1999)

On average, owners tend to overestimateoverestimate the value of their homes by around 5%, though the estimates of the bias range from minus 2 percent to 16 percent

The extent of overestimation is not correlated with owner, property or neighborhood characteristics

Thus, the surveys do provide reasonable estimates of Thus, the surveys do provide reasonable estimates of dwelling valuations (with a uniform slight upward bias)dwelling valuations (with a uniform slight upward bias)

Value-added of this studyValue-added of this study

Focus on investigating the accuracy of Focus on investigating the accuracy of subjective valuations across a distribution of subjective valuations across a distribution of dwelling valuesdwelling values

Based on a large dataset (more then 21K Based on a large dataset (more then 21K observations) that contains a rich variety of observations) that contains a rich variety of homeowner, dwelling, neighborhood and homeowner, dwelling, neighborhood and environment characteristics and covers more environment characteristics and covers more than a decade (1997–2008) than a decade (1997–2008)

Examine the interval of time in which “news” Examine the interval of time in which “news” about transaction prices in the respondents’ about transaction prices in the respondents’ residential environment “trickle-down” into residential environment “trickle-down” into individuals’ dwelling evaluations individuals’ dwelling evaluations

This study aims:This study aims:

To examine the extent of accuracy of To examine the extent of accuracy of homeowners’ subjective valuations homeowners’ subjective valuations across a across a distribution of dwelling sale pricesdistribution of dwelling sale prices, while , while exploring:exploring:

whether the valuations of inexpensive and whether the valuations of inexpensive and expensive properties are biased in the same expensive properties are biased in the same direction;direction;

whether the variance of the bias is homoscedastic whether the variance of the bias is homoscedastic across the distribution of property value across the distribution of property value

what factors are associated with the valuation biaswhat factors are associated with the valuation bias

Data constructionData construction

Household Household Expenditure Expenditure

SurveysSurveys

Annual sample of more than 6000 households countrywide. Pooled sample of 72K in 12

years

Sale Sale Transactions Transactions

FilesFiles

612K transactions in 1997-2008

Research Dataset

Owners’ Owners’ dwelling dwelling

valuationsvaluations

Demographic, Demographic, social, economic social, economic indicators of the indicators of the household and household and

its head its head

Characteristics Characteristics

of the propertyof the property

Data on Data on demographic demographic

and and socioeconomic socioeconomic indicators of indicators of

population by population by census tractcensus tract

Prices, Prices, timing and timing and number of number of

transactions transactions by census by census

tracttract

Population Register

&Income Tax

records GISGIS

Data on Data on environment environment and location and location indicators of indicators of

neighborhoodneighborhood

Research populationResearch population

Households:

that live in dwellings they own (71% of the survey that live in dwellings they own (71% of the survey sample);sample);

whose dwellings were geo-referenced at the level of whose dwellings were geo-referenced at the level of structure or census tract;structure or census tract;

that provided valuation of their dwellings (less of 15% of that provided valuation of their dwellings (less of 15% of item non-response); item non-response);

that live in Israel’s sixty largest cities (assumed of having that live in Israel’s sixty largest cities (assumed of having regular housing market conditions)regular housing market conditions)

After merging the records on these households with an After merging the records on these households with an average price of transactions in the census tract in the average price of transactions in the census tract in the three-months window preceding the survey interview, three-months window preceding the survey interview, working file contained 21,238 observationsworking file contained 21,238 observations

Correlation between subjective valuation and average price of sales transactions in census tract, by deciles of valuation and period of time between valuation and sales transactions

0.000

0.050

0.100

0.150

0.200

0.250

1 2 3 4 5 6 7 8 9 10

subjective valuation deciles

coef

fici

ent

of

corr

elat

ion

12 months after 9 months after 6 months after 3 months after concurrent

3 months before 6 months before 9 months before 12 months before

Subjective valuation vs. average dwelling price in census tracts, by percentiles of dwelling-price distribution, 1997–2008

10

11

12

13

14

15

0 10 20 30 40 50 60 70 80 90 100

percentiles of dwelling price distribution

Ln

of

sub

ject

ive

valu

atio

n

and

d

wel

lin

g

pri

ce

subjective valuation average dwelling price

Average bias of subjective valuation and its standard deviation

-50

0

50

100

150

200

250

300

350

0 10 20 30 40 50 60 70 80 90 100percentiles of dwelling price distribution

per

cen

t

average bias standard deviation of bias

Average bias in subjective valuation by selected percentiles of annual dwelling-price distribution, 1997–2008

-10

0

10

20

30

40

50

60

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

perc

ent

percentiles 11-20 percentiles 45-54 percentiles 81-90

Average price of dwelling, by selected percentiles of annual dwelling-price distribution, 1997–2008 (in current prices, index 1997=100)

60

80

100

120

140

160

180

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Years

Ind

ex

Percentiles 11-20 Percentiles 45-54 Percentiles 81-90

Main results (1)Main results (1) Homeowners tend to overestimate the value of their

dwellings by 27 percent, with the median bias of 23 percent

The valuations of inexpensive and costly dwellings are biased in different directions: estimates reported by people who live in the dwellings that are placed in the first eight deciles of the price distribution are upward-biased, whereas those who live in the most expensive dwellings tend to understate the value of their homes

In relative terms, subjective valuations bias is much higher among the owners of inexpensive dwellings

Variance of valuation bias is heteroscedastic in the lowest 20 and the top 10 percentiles of the price distribution

The modelThe model

Dependent variableDependent variable: bias in subjective dwelling valuation relative to the average sale-transaction price of dwellings in the census tract in the three months preceding the survey

‘Household’’ - indicators of an owner-occupier household (number of persons, average income per capita in household, and size of the mortgage loan)

‘‘Personal’’ - homeowner characteristics (sex, age, marital status, origin etc.)

‘‘Asset’- dwelling indicators (whether it is a stand-alone house or an apartment in a condominium building, number of rooms, age of building etc.)

‘‘AvgTract’ - indicators of the census tract in which the dwelling is located (socio-demographic characteristics of residents)

‘Area’ – environmental characteristics of the dwelling’s nearest surroundings

‘dUSD’ - the change in the exchange rate (NIS/dollar) in the three months preceding the survey date

‘NumTransactCT’’ - the number of sales transactions in the census tract three months preceding the individual’s subjective valuation

‘‘Year’ - fixed effect for the year in which the subjective valuation of dwelling i was given

‘ ‘CT’ - fixed effect for census tract in which the valuated dwelling i was located

ijttjttijt

iiijtijt

uYeartCTNumTransacdUSDAreaAvgTract

AssetPersonalHouseholdiceCTAvgValuation

87654

321

)ln(

)Prln(

Models estimated in the studyModels estimated in the study

Subjective valuation, a hedonic price model with addition Subjective valuation, a hedonic price model with addition of average price and the number of transactions in census of average price and the number of transactions in census tracttract On the full sample (21,23821,238 obs.) On the sub-sample of dwellings purchased in 12 months

preceding the survey (738 obs.)

Bias in subjective dwelling valuation, according to the Bias in subjective dwelling valuation, according to the main model:main model: For the full sample with a fixed effect for year (A)(A) For the full sample with a fixed effect for census tract (B)(B) For the sub-sample of dwellings purchased in 12 months

preceding survey (C)(C) For the sub-samples of census tracts in which no fewer than

ten, twenty and thirty observations were found in a census tract in the whole research period

Bias model estimates Bias model estimates Full sample

Sample of dwellings purchased in 12

months preceding survey (C)

Fixed effect for Fixed effect for years (A) years (A)

Fixed effect for Fixed effect for census tract (B)census tract (B)

VariablesVariables Estimate (Std. error)Estimate (Std. error) Estimate (Std. error)Estimate (Std. error) Estimate (Std. error)Estimate (Std. error)

Persons 0.010* (0.002) 0.009* (0.002) 0.023*** (0.012)

Income 0.066* (0.005) 0.067* (0.005) 0.102* (0.027)

Mortgage -0.004* (0.001) -0.003* (0.001) -0.008*** (0.004)

Age 0.004* (0.001) 0.003** (0.001) 0.002 (0.005)

AgeSq -0.00003** (0.00001) -0.00002*** (0.00001) -0.00002 (0.00006)

IsraelBorn 0.025* (0.008) 0.020** (0.008) -0.021 (0.049)

Immigrant1990-0.075* (0.011) -0.052* (0.010) -0.051 (0.050)

ImmEurAmer-0.015*** (0.009) -0.010 (0.008) -0.046 (0.055)

Married0.041* (0.008) 0.045* (0.007) 0.044 (0.034)

* - Significant at .01 level ** - Significant at .05 level *** - Significant at .10 level

Full sample Sample of dwellings purchased in 12

months preceding survey (C)

Fixed effect for Fixed effect for years (A)years (A)

Fixed effect for Fixed effect for census tract (B)census tract (B)

VariablesVariables Estimate (Std. error)Estimate (Std. error) Estimate (Std. error)Estimate (Std. error) Estimate (Std. error)Estimate (Std. error)

Purchased-0.089* (0.011) -0.105* (0.010) -0.098 (0.080)

House0.109* (0.007) 0.143* (0.007) 0.122* (0.030)

Rooms0.172* (0.003) 0.196* (0.003) 0.131* (0.017)

BuildingAge-0.007* (0.001) -0.014* (0.0007) -0.004 (0.003)

BuildingAgeSq0.0001* (0.00001) 0.0001* (0.00001) 0.0001*** (0.00005)

AirConditioner0.046* (0.007) 0.050* (0.007) -0.001 (0.029)

Heating0.056* (0.010) 0.064* (0.011) -0.002 (0.056)

Garden0.072* (0.019) 0.114* (0.018) -0.030 (0.064)

Bought within 12 months 0.027*** (0.015) 0.002 (0.014) -

Price- - 0.163* (0.030)

dUSD0.751* (0.076) 0.712* (0.073) 0.133 (0.335)

NumTrasactCT-0.007* (0.001) -0.006* (0.001) -0.005** (0.002)

MaleCT-0.761* (0.177) 0.189 (0.249) -1.288 (0.873)

Full sampleSample of dwellings

purchased in 12 months preceding

survey (C)Fixed effect for Fixed effect for years (A)years (A)

Fixed effect for Fixed effect for census tract (B)census tract (B)

VariablesVariables Estimate (Std. error)Estimate (Std. error) Estimate (Std. error)Estimate (Std. error) Estimate (Std. error)Estimate (Std. error)

AgeCT0.008* (0.001) 0.002 (0.001) 0.003 (0.004)

Immigrant1990CT0.285* (0.029) 0.217** (0.088) 0.299** (0.139)

ImmEurAmerCT-0.338* (0.064) -0.126 (0.137) -0.080 (0.313)

ImmAsiaAfricaCT-0.292* (0.071) -0.024 (0.149) -0.158 (0.326)

EthiopiaCT0.738* (0.103) 0.169 (0.210) 1.320* (0.442)

IncomeCT-0.083* (0.007) 0.002 (0.015) -0.131* (0.033)

RoadArea0.002** (0.001) -0.001 (0.001) 0.006 (0.004)

Road5mArea-0.009** (0.004) 0.003 (0.004) -0.026 (0.017)

SchoolArea0.003* (0.001) 0.0001 (0.002) 0.002 (0.003)

No’ of Obs.21,238 21,238 738

Mean dependent variable 0.112 0.112 0.108

Mean bias (pct.)26.8 26.8 19.3

Adjusted R2 0.29 0.10 0.33

Main results (2)Main results (2) The interval of three months before the survey date is found

to have the highest correlation between valuations and average transaction prices in a given census tract for most of the dwelling-value distribution

No dependency between the extent of valuation bias and sample size in the census tract

There is a significant and systematic relation between subjective valuation bias and homeowner personal indicators, dwelling properties and census-tract population characteristics

Basic dwelling characteristics (number of rooms and age of building) and the socioeconomic level of the neighborhood exert a larger impact on valuation bias among the owners who bought their dwellings during the twelve months preceding the survey date, relatively to the rest of owners, whereas the bias among the latter is more influenced by dwelling facilities (air conditioning, heating systems, garden)

The observation of a mean (upward) bias in The observation of a mean (upward) bias in subjective valuations relative to actual subjective valuations relative to actual dwelling prices masks quite a bit of variation dwelling prices masks quite a bit of variation across the distribution; the bias may even across the distribution; the bias may even change the sign along the distribution. change the sign along the distribution.

What the reasonable explanations could be assumed?What the reasonable explanations could be assumed?

The bottom lineThe bottom line

What explains the bias sign change?? Does it square with luxury housing as a Veblen good? Is it about a segment of housing market where subjective

valuations do not catch up systematically with a pace of prices rise?

Do owners of expensive dwellings differ from the owners of lower-priced accommodations in the manner of thinking and the considerations that figure in evaluating a dwelling?

Does an upward bias at the lower end of the dwelling-valuation distribution take shape as a consequence of liquidity constraints among owners of inexpensive dwellings that bring about a price level for such dwellings under fair market value?

Is an overvaluation of the least expensive dwellings by their owners akin to an extremely importance of certain utilities of home ownership (stability, local welfare services, community support etc.) for low-income persons?

Thank you