JOURNAL OF HOUSING ECONOMICS 2, 324-338 (1992)

Estimating House Price Appreciation:

A Comparison of Methods*
THEODORE M. CRONE AND RICHARD P. VOITH

Federal Reserve Bank of Philadelphia

Received February 5, 1993

Several parametric and nonparametric methods have been advanced over the
years for estimating house price appreciation. This paper compares five of these
methods in terms of predictive accuracy, using data from Montgomery County,
Pennsylvania. The methods are evaluated on the basis of the mean squared pre-
diction error and the mean absolute prediction error. A statistic developed by
Diebold and Mariano is used to determine whether differences in prediction errors
are statistically significant. We use the same statistic to determine the effect of
sample size on the accuracy of the predictions. In general, parametric methods of
estimation produce more accurate estimates of house price appreciation than
nonparametric methods. And when the mean absolute prediction error is used as
the criterion of accuracy, the repeat sales method produces the most accurate
estimate among the parametric methods we tested. Finally, of the five methods we
tested, the accuracy of the repeat sales method is least diminished by a reduction
in sample size. 0 1992 Academic Press, Inc.

An accurate estimate of the appreciation rate of houses is crucial for

addressing a number of economic issues. It is a necessary statistic for
calculating the user cost of owner-occupied housing and, therefore, for
determining the relative advantage of owning versus renting one’s home.
It is used in comparing the rate of return on investment in residential
rental properties to the rate of return on other types of assets. House price
appreciation can also be an indicator of the strength of the local economy,
and differences in appreciation rates can reflect differences in regional
economic performance.
The importance of housing appreciation has resulted in the develop-
ment of a number of house price indexes, some at the national level and
some for metropolitan areas or smaller localities. A fairly large literature
has developed on the adequacy of these indexes, and several papers have
compared different methods of constructing house price indexes

* The views expressed in this paper are those of the authors and do not necessarily reflect
those of the Federal Reserve Bank of Philadelphia or the Federal Reserve System.

324
1051-1377/92 $5.00
Copyright 0 1992 by Academic Press, Inc.
All rights of reproduction in any form reserved.
 ESTIMATING HOUSE PRICE APPRECIATION 325

(Palmquist, 1980; Mark and Goldberg, 1984; Hendershott and Thibodeau,

1990; Case et al., 1991; Clapp et al., 1991; Ham-in and Hendershott, 1991;
Meese and Wallace, 1991).
In this article we compare five different methods of estimating a com-
mon appreciation rate for single-family houses in a local area and judge
the accuracy of each method by how well it would have predicted the
known appreciation rates for individual houses. The article differs from
earlier studies in two important respects. First, we evaluate the methods
based on the predictive accuracy of the appreciation-rate estimates when
applied to a test sample of houses, none of which was used in the estima-
tion process. Second, we distinguish clearly between the efficiency gain
resulting from the use of a different estimation method and the efficiency
gain resulting from the use of a larger sample size. For each of the five
methods, yearly appreciation rates for 1974 through 1988 are estimated
using the identical large sample of 7873 houses, so any differences in the
estimated appreciation rates or in the precision of the estimates are not
due to differences in sample size. Applying a test statistic developed by
Diebold and Mariano (1991), we determine in a pairwise fashion whether
the predictive accuracy of the estimates derived from each method differs
significantly from the estimates derived from the other four. We test the
accuracy of the estimates with respect to both the mean squared predic-
tion error and the mean absolute prediction error. Having tested the rela-
tive accuracy of the estimates derived from our large sample, we reesti-
mate the appreciation rates with randomly selected smaller samples to see
how sample size affects the accuracy of each method. The Diebold-
Mariano statistic is also used to measure the relative predictive accuracy
of estimates from different sized samples.
For our large sample, parametric methods of estimating appreciation
rates were found to be more accurate than nonparametric methods when
the mean squared prediction error was used as a criterion of accuracy. In
general, the differences were statistically significant at the 0.05 or 0.10
level. With the exception of the repeat sales estimator, the superiority of
the parametric methods was less clear when the mean absolute prediction
error was used as the criterion of accuracy. When the mean absolute
prediction error was used as the criterion, our repeat sales estimator
provided significantly more accurate predictions of housing appreciation
than any other method. The choice of which criterion to use depends on
whether one wants to weight large errors proportionately more than
smaller ones.
The effect of sample size on the accuracy of the estimates was also
dependent on which criterion was used -mean squared prediction error
or mean absolute prediction error. By either criterion, reducing the sam-
ple size significantly reduced the accuracy for the nonparametric methods
326 CRONE AND VOITH

more frequently than for the parametric methods. Also, for all five meth-
ods, reducing the sample size had less effect on the mean squared predic-
tion error than on the mean absolute prediction error.
Section 1 of the paper describes the data used to estimate and evaluate
all the models discussed in Section 2. A brief comparison of the estimated
appreciation rates is presented in Section 3. Section 4 evaluates the five
methods based on the Diebold-Mariano test. Section 5 draws some con-
clusions about the choice of estimation methods for empirical research.

1. THE DATA

The primary data source for this comparative study is the Montgomery
County, Pennsylvania, tax assessment file. From that file we extracted
15,197 repeat sales of single-family detached dwellings whose second sale
occurred between 1973 and 1988. No house was included in the sample
more than once no matter how many times it was sold between 1973 and
1988 because the data on the file included only the two most recent sale
prices. Using a random number generator we divided this sample into two
subsamples, one with 7873 observations used to estimate the appreciation
rates and one with 7324 observations used to test the predictive accuracy
of the appreciation-rate estimates. Because of the small number of obser-
vations for some years, however, the test sample used in this paper was
limited to houses whose first and second sales occurred between 1976 and
1988 reducing the size of the ultimate test sample to 5687. The estimating
sample includes nearly 5% of all single-family detached dwellings in
Montgomery County, and the estimating and ultimate test sample to-
gether include more than 9% of the single-family detached units in the
county. The average interval between sales in the estimating sample was
5.6 years.
For each housing unit in the sample, we have information on the most
recent sale price, the previous sale price, the dates of sale, a number of
housing attributes, and the location by census tract.’ The housing attrib-
utes include the presence or absence of central air conditioning, a fire-
place, a garage, or a pool, the number of bathrooms, the age of the house,
the size of the house, and the lot size. The data on house price and
attributes are merged with data at the census tract level that provide
additional information on neighborhood characteristics and accessibility
to Philadelphia’s Central Business District (CBD). From the 1980 Census

I We have data on transactions in 192 of the 200 Montgomery County census tracts. We
eliminated sales of less than $10,000 and more than $l,OOO,OOO.The data on the housing
traits are at the time of the second sale. It was not possible to determine if there had been
any changes in traits between sales.
 ESTIMATING HOUSE PRICE APPRECIATION 327

TABLE I
Means of the Variables

Estimating Test
sample sample
(A’ = 7873) (N = 5687)

Housing attributes
House price (1990 $) 135,243 136,442
Central air (Y/N) 0.25 0.23
Number of bathrooms 1.84 1.81
Fireplace (Y/N) 0.58 0.55
Age (years) 37.4 39.0
Garage (Y/N) 0.75 0.74
Pool (Y/N) 0.07 0.07
Living area (sq. ft.) 1,907 1,865
Lot size (sq. ft.) 17,732 17,469
Neighborhood attributes
Average household size 2.89 2.89
% Population black 3.39 3.34
% Single family detached 68.1 67.9
Accessibility attributes
Train service (Y/N) 0.52 0.51
Average commuting time (minutes) 22.5 22.4
Highway time to the CBD (minutes) 54.2 54.2

of Population, we include average household size in the census tract, the

percentage of the population that is black, and the percentage of housing
units in the tract that are single-family detached houses. In addition to
housing and neighborhood characteristics, we include measures of acces-
sibility to Philadelphia and otherjob centers, i.e., the highway travel time
to the CBD, average commuting time, and the availability of commuter
rail service.2 The means of the second-sale prices and housing and neigh-
borhood characteristics are given in Table I for the estimating sample and
the test sample. Both sale prices are in 1990 dollars, and we used the U.S.
CPI to inflate the original prices.

2. THE FIVE METHODS OF ESTIMATING APPRECIATION RATES

We compare two nonparametric and three parametric methods of esti-

mating house price appreciation. The three parametric methods include
two hedonic specifications, one with no constraints on the prices of spe-

* The highway travel time to the CBD is from the Delaware Valley Regional Planning
Commission. Average commuting time is from the 1980 Census of Population and Housing.
The presence of a commuter rail station in the neighborhood is calculated as in Voith (1993).
328 CRONE AND VOITH

cific traits over time and one constraining all trait prices to increase at the
same rate. The third parametric method uses the first- and second-sale
prices to estimate annual appreciation rates.
The nonparametric methods. The simplest nonparametric estimate of
house price appreciation is the percentage increase in the mean price of
houses sold in any two periods. This method is frequently used in the
popular press but takes no account of differences in the quality of houses
sold in one period versus another. The use of the median house price
rather than the mean price is sometimes seen as an attempt to control for
differences in the quality of houses sold in different periods. The sale of
an abnormal number of very high priced or very low priced units in a
given quarter or year should influence the median price less than the mean
price. And perhaps the most frequently used measure of house price
appreciation for metropolitan areas in the United States is the percentage
increase in the median price of houses sold as calculated by the National
Association of Realtors (NAR).3
In the first two columns of Table II we report the housing appreciation
rates in Montgomery County from 1974 through 1988 estimated by these
two nonparametric methods. In calculating these appreciation rates we
included each house only for the year of the second sale in order to keep
the sample size for the nonparametric methods the same for all the meth-
ods that we examined. In the repeat sales method to be discussed later the
first and second sale represent only one observation.
The hedonic methods. The usual method of controlling for differences
in quality when comparing house prices across different markets or time
periods is to estimate a hedonic equation. The original purpose of these
models was to compare the price of a constant-quality house across hous-
ing markets (see Thibodeau, 1989), but the method can also be used to
estimate housing appreciation rates in a given market. In a straightfor-
ward application of the models used in cross-market comparisons, hous-
ing trait prices are estimated for each period in a single market. By apply-
ing the estimated hedonic prices to a standard set of attributes, the price
of a constant-quality house is calculated for each period. In our first
application of the hedonic method, trait prices are estimated for each year
according to the model in Eq. (1). We estimated the model in logs so this
unconstrained hedonic model has the same basic specification as the con-
strained model to be discussed below.

(1)

3 The NAR is careful to point out that the change in the median sale price does not
measure the change in the cost of a standard house.
 ESTIMATING HOUSE PRICE APPRECIATION 329
TABLE II
Estimated Real Annual Appreciation Rates

Mean Median
sales sales Unconstrained Constrained Repeat
Year price price hedonic hedonic sales

1974 -1.35 -2.78 2.15 -8.30 1.49

1975 9.07 4.71 -0.74 -0.65 -2.91
1976 -8.38 -6.37 -2.43 -0.28 2.22
1977 4.03 3.35 2.13 1.24 0.52
1978 -0.65 -3.20 2.10 1.82 1.07
1979 -2.31 -4.44 -0.31 -0.88 -2.49
1980 1.60 2.57 -6.65 --7.09 -4.16
1981 -5.23 -2.31 -4.59 -5.28 -6.85
1982 -5.55 -4.30 -6.83 -5.40 -4.05
1983 0.96 -4.97 6.80 6.29 4.52
1984 2.24 2.44 2.90 2.96 4.19
1985 9.27 5.91 9.07 9.11 6.31
1986 13.17 11.49 15.18 15.15 15.60
1987 11.26 18.23 12.73 12.94 13.29
1988 12.37 9.17 13.11 12.74 12.67
Cumulative
(1973-1988) 44.45 29.64 50.23 35.32 46.01
Cumulative
(1976-1988) 46.53 36.01 51.85 48.94 44.95

where

P = the second-sale price of the house,

Xk = the kth characteristic of the house for continuously measured attrib-
utes (k = 1, . . . , m),

X, = the pth characteristic of the house for binary attributes (p = m + 1,

. . . ) 4).

A series of hedonic equations was estimated using sales data for individ-
ual years, allowing the vector of estimated trait prices (j3) to vary freely
from year to year. The sale price (P) was the price at the second sale, so
each of the 7873 observations was used only once in estimating the series
of equations. Thus, the size of the total sample was kept the same as that
for the other methods of estimation. The characteristics (X) for which
hedonic prices were estimated are those listed in Table I.4

4 The full set of regression estimates for this equation and the regression results for Eq. (2)
and (5) below are available from the authors upon request. The coefficients on the majority
of housing and neighborhood characteristics are highly significant and of the expected sign
and magnitude.
330 CRONE AND VOITH

A constant-quality house price was computed for each year using the
estimated /3s and a standard set of housing characteristics, namely, the
mean value of each characteristic given in column 1 of Table I. The
appreciation rates were calculated from the estimated price of this con-
stant-quality house. Since the estimates of /3 are allowed to vary from
year to year, we labeled this the unconstrained hedonic method. The
estimates of the yearly appreciation rates are reported in column 3 of
Table II.
We also estimated appreciation rates using a second hedonic model in
which all the trait prices were constrained to increase at the same rate in
any given year. The model is represented in Eq. (2).

In P = PO + 2 Pk In Xk + 2 Y,X, + i 6,+jD,+j + &, (2)

k=l p=m+l j=l

where P, XK, and X, are defined as in Eq. (1) and

t = the initial period of the sample (1973),

D,+j = a dummy variable equal to one if the period t + j occurs between

the initial period and the sale of the property (including the year of
sale), and equal to zero otherwise,

6,+j = ln( 1 f a,+j), where at+j = the rate of change in house prices be-
tween peirod t + j - 1 and period t + j.

In this model the yearly appreciation rates for a constant-quality house

can be derived directly from the estimated parameters 6,+j. The housing
characteristics are the same as those used to estimate Eq. (1). Since this
method constrains all the trait prices to increase at the same rate, we have
labeled it the constrained hedonic method. The estimated appreciation
rates for 1974 through 1988 are given in column 4 of Table II.
The repeat sales method. While hedonic estimations are the most
common method of controlling for quality in estimating house price ap-
preciation, a number of recent studies have argued for the use of repeat
sales (see Case and Shiller, 1987, 1989; Abraham and Schauman, 1991).5
A regression model for estimating appreciation rates from repeat sales

5 In the modern literature, the case for using repeat sales was first made by Bailey et al.
(1963). Case and Quigley (1991) argue for a hybrid hedonic/repeat sales method. But the
superiority of this method is questioned in Case et al. (1991).
 ESTIMATING HOUSE PRICE APPRECIATION 331

data is easily derived from the identity

k-l

py = Py-k n (1 + ay-m), (3)

m=O

where

Py = the market price of a house in the year of the second sale,

Py-k = the market price of the house in the year of the previous sale, k
years prior to the second sale,

ay-m = the rate of appreciation of the house between year y - m - 1 and

year y - m.

Dividing both sides of Eq. (3) by Py--I(and taking logs we obtain

Thus, data on repeat sales transactions with at least some sales in each
year can be used to estimate yearly appreciation rates. The estimating
equation is

= 2 BhDh + E,
h=l

where

Py = the second-sale price,

Py* = the initial sale price,

Dh = a year dummy equal to 1 if the year h occurs between the time of

the first sale and the time of the second sale (including the year of
the second sale).

The estimated coefficient 6h will equal ln(l + oh), where (Yhis the housing
price appreciation rate in year h. It should be noted that the estimate of ah
is determined not only by the houses sold in year h but also by houses
whose first sale was prior to year h and whose second sale was after year
h. The estimates derived from Eq. (5) are reported as the repeat sales
estimates in the fifth column of Table II.
332 CRONE AND VOITH

3. COMPARISON OF ESTIMATED APPRECIATION RATES

Since house prices in our sample were adjusted for inflation, the appre-
ciation rates reported in Table II are estimated real appreciation rates.
When we compare the estimated appreciation rates year by year, there is
no obvious ordering according to method. Each of the methods produced
the highest estimated appreciation in at least 1 year and the lowest esti-
mated appreciation in at least 1 year. The largest differences in estimated
rates are concentrated in the years 1974 through 1976. The smaller num-
ber of observations in the years 1973 to 1975 resulted in less precise
estimates of the appreciation rates.” For some of the smaller samples used
to test the effects of sample size on accuracy there were not enough
observations to estimate the appreciation rates for 1974-1976 by the un-
constrained hedonic method. Therefore, we confined all the tests for ac-
curacy to the period 1977-1988.
The last two rows in Table II present the cumulative estimated appreci-
ation for both the H-year period 1973 to 1988 and the 12-year period 1976
to 1988. The estimates derived from the median sale price produced the
lowest cumulative appreciation over both periods. The constrained he-
donic method produced a low cumulative appreciation for the 15-year
period, but this is due mainly to the large estimated decline in 1974. For
the 12-year period 1976 to 1988 the cumulative appreciation from the
constrained hedonic method is closer to that of the other parametric
methods.
The pattern of signs on the estimated appreciation rates differs between
the nonparametric methods (columns 1 and 2) and the parametric methods
(columns 3, 4, and 5). The signs for all three parametric methods, how-
ever, are the same in any given year except for the early years 1974
through 1976. Moreover, the signs on the appreciation rates estimated by
the parametric methods reveal a clear cyclical pattern in the early 1980s.
For the recession years 1980-1982 and the preceding year all the paramet-
ric estimates are negative.

4. EVALUATING THE ESTIMATION METHODS

Every observation in our sample includes the house price for the most
recent sale and the previous sale, which provides a unique opportunity to
evaluate the accuracy of the five series of estimated appreciation rates.
We use the out-of-sample prediction error of the appreciation rate as the
6 No appreciation rate could be estimated for 1973, since that is the base year for our
sample. In terms of second sales, our estimating sample included only 21 observations for
1973,78 observations for 1974, and 114 observations for 1975. In the other years the number
of observations ranged from 197 to 1199.
 ESTIMATING HOUSE PRICE APPRECIATION 333

measure of accuracy for the estimates. It is the only available measure of

accuracy for nonparametric methods. Furthermore, in contrast to some
earlier studies that evaluate hedonic models by how well they explain the
in-sample variation in house prices, our evaluation of the models is based
solely on how well they predict the appreciation rate for out-of-sample
houses.7
Both our estimating sample and our test sample include only houses
that sold twice between 1973 and 1988. Some would argue that this is not a
representative sample of the stock of housing (Clapp et al., 1991), and the
appreciation rates for these houses might differ from the appreciation
rates for all single-family houses in the county. We did not examine this
issue. But any sample selection bias would apply equally to the estimating
sample and the test sample and should not bias the tests of relative accu-
racy toward any one method.
Since we have the prices at two sale dates, we can calculate the actual
appreciation for each house between those two dates. For each method of
estimating appreciation rates, we can also calculate the estimated appre-
ciation over the interval between the two sale dates. By subtracting the
estimated rate from the actual rate we obtain an out-of-sample prediction
error for the appreciation rate for each house in our test sample. To avoid
biasing our tests against some models because of the small number of
observations in the early years, we evaluated the accuracy of the five
methods based on appreciation rates from 1977 to 1988. Therefore, we
had to eliminate from our original test sample any house whose first sale
was prior to 1976. This left a final test sample of 5687 houses sold more
than once between 1976 and 1988.s We calculated the prediction errors for
the appreciation of these houses using the estimates from each of the
methods described in this article.
We examined the relative accuracy of the five methods of estimation
based on two loss functions-the mean squared prediction error and the
mean absolute prediction error. The choice between these two loss func-
tions depends on whether the welfare loss from a prediction error in-
creases more than proportionately with the size of the error. If we desig-
nate the loss function as g(e), where e is the prediction error, the loss
’ Case et al. (1991) do report the number of estimated quarterly appreciation rates in each
of their models that are significantly different from zero in a statistical sense, but since we
have no independent information on the true appreciation rates we do not know how many,
if any, should be statistically different from zero.
8 We did not eliminate from our estimating sample those houses whose first sale occurred
in 1976 or earlier. Eliminating those houses would not have affected the appreciation rates
estimated by the nonparametric methods or the unconstrained hedonic method because the
post-1976 estimates from these methods do not depend on these earlier observations. Elimi-
nating houses whose first sale was pre-1976 and whose second sale was post-1976, however,
would have reduced the number of observations determining the coefficients on the dummy
variables for the years 1977-1988 in the constrained hedonic and repeat sales methods.
334 CRONE AND VOITH

differential between two estimation methods i andj for any observation II

will be d,, = [g(e;,) - g(ej,)]. Under the hypothesis of equal accuracy for
the two estimation methods, the population mean of d, is zero. The sam-
ple mean loss differential is

2 = i $I [g(ei,) - g(ej,)l.
n-l

Under general conditions

-\r d- NW,
fd(O))r
wherefd(0) is the spectral density of d,, at frequency zero. Based on this
distribution, Diebold and Mariano (1991) have developed a statistic

zi
DM=

which under the null hypothesis is asymptotically distributed N(O,l). The

Diebold-Mariano test statistic is an improvement over other tests of pre-
dictive accuracy because it does not assume that prediction errors are
zero-mean, normally distributed, or serially or contemporaneously uncor-
related. Moreover, g(e) is not confined to be the mean squared prediction
error but can be any loss function for which we can take an expectation
and whose value is always positive. The statistic makes use of the fact
that the sample mean loss differential is asymptotically normal but the
cross-correlations in the variance-covariance matrix must be taken into
consideration when computing its variance. Diebold and Mariano present
a formula for estimating this variance for large samples. Since asymptoti-
cally under the null hypothesis

DM - N(O,l)

the probability of there being no difference in the mean loss differential is

easily calculated.
The sign of the DM statistic indicates which set of predictions is more
accurate. Since the loss from the j estimate is substracted from the loss
from the i estimate, a negative DM statistic indicates that i predicts better
thanj, and a positive statistic indicates the reverse. The absolute value of
the DM statistic indicates whether the two sets of predictions are signifi-
cantly different in a statistical sense.
Table III presents the DM statistics for pairwise comparisons of the
accuracy of the five estimation methods based on the mean squared pre-
 ESTIMATING HOUSE PRICE APPRECIATION 335

TABLE III
Diebold-Mariano Test Statistic
for Difference in Mean Squared Prediction Error
(Loss from Method in Row Minus Loss from Method in Column):
N = 5687

Constrained Unconstrained Mean Median

hedonic hedonic sales price sales price

Repeat sales 1.8610 1.3582 - 1.6296 -3.7295

(0.0628) (0.1762) (0.1031) (0.0001)
Constrained hedonic 0.9170 -2.0681 -3.4854
(0.3592) (0.0386) (0.0004)
Unconstrained hedonic - 1.8924 -3.0774
(0.0584) (0.0020)
Mean sales price -3.9808
(O.OOOl)

Nore. Parentheses indicate probability that appreciation-rate estimates produced by the

two methods do not differ.

diction error. The negative values of the test statistic in the last column
and the probabilities in parentheses indicate that, based on this criterion,
the other four methods are significantly more accurate than the median
sales price method. The parametric methods are also more accurate than
the mean sales price method, but the difference is unambiguously signifi-
cant at the 0.05 level only for the constrained hedonic method, marginally
significant at the 0.05 level for the unconstrained hedonic method, and
marginally significant at the 0.10 level for the repeat sales method. Among
the three parametric methods, the differences in accuracy based on the
mean squared prediction error are not statistically significant at the 0.05
level, The constrained hedonic method, however, is more accurate than
the repeat sales method at the 0.10 level.
When we use the mean absolute prediction error as the criterion, the
pattern of relative accuracy changes somewhat (see Table IV). The me-
dian sales price method is again the least accurate of the five methods, but
it is not significantly less accurate than the unconstrained hedonic
method. The two hedonic methods are not significantly more accurate
than the mean sales price method. Finally, under the mean absolute error
criterion, the repeat sales method is significantly more accurate than the
other methods tested including the two other parametric methods, and the
constrained hedonic method is significantly more accurate than the un-
constrained hedonic method.
In general, for our large sample, parametric methods produced smaller
mean squared prediction errors than nonparametric methods-in most
cases significantly smaller at the 0.05 or 0.10 level. Among the parametric
methods, there was a significant difference in accuracy at the 0.05 level
336 CRONE AND VOITH

TABLE IV
Diebold-Mariano Test Statistic
for Difference in Mean Absolute Prediction Error
(Loss from Method in Row Minus Loss from Method in Column):
N = 5687

Constrained Unconstrained Mean Median

hedonic hedonic sales price sales price

Repeat sales -2.1341 -3.4609 -2.9347 -4.5712

(0.0328) (0.0005) (0.0033) (0.000l)
Constrained hedonic -3.7700 - 1.4898 -3.2244
(0.0001) (0.1362) (0.0012)
Unconstrained hedonic 0.8741 ~ 1.4072
(0.3821) (0.1593)
Mean sales price -3.2694
(0.0010)

Note. Parentheses indicate probability that appreciation-rate estimates produced by the

two methods do not differ.

only when the mean absolute prediction error was used as the criterion
rather than the mean squared prediction error.g
Predictive accuracy is affected not only by the method of estimation but
also by the size of the estimating sample. This is especiall’y important in
the case of the repeat sales method because the need for two sales of the
same property seriously reduces the size of available samples. To examine
the effect of sample size on the accuracy of the five methods discussed in
this article, we randomly generated from our full estimating sample of
7873 houses 20 subsamples approximately one-half the size of the total
estimating sample and 20 subsamples approximately one-quarter the size
of the total estimating sample. We estimated yearly appreciation rates by
the five methods discussed in this paper using each of these 40 subsam-
pies. Applying the Diebold-Mariano statistic, we calculated for each
method how many of the 40 subsample estimates were less accurate than
the full sample estimates at the 0.05 level of significance. The results are
reported in Table V.
Our tests indicate that the accuracy of the parametric methods is less
sensitive to sample size than the accuracy of the nonparametric methods.
Using the mean squared prediction error as the criterion of accuracy, the
nonparametric methods are significantly less accurate 9 or 10 times out of
20 when the half-sized sample is used for the estimation. They are signifi-
cantly less accurate 10 or 15 times out of 20 when the quarter-sized

9 The general conclusions in this paragraph also hold true when the full test sample of 7324
observations is used and the estimated appreciation rates for the years 1974 through 1976 are
included.
 ESTIMATING HOUSE PRICE APPRECIATION 337

TABLE V
Effects of Sample Size on Accuracy

Mean Median
Repeat Constrained Unconstrained sales sales
sales hedonic hedonic price price

Proportion of times reduction in sample

size increased the mean squared prediction
error at 0.05 level of significance
Half-sized sample 4120 O/20 1120 1o/20 9120
Quarter-sized sample 2120 4120 5120 15120 IO/20

Proportion of times reduction in sample

size increased the mean absolute prediction
error at 0.05 level of significance
Half-sized sample l/20 9120 12120 17/20 17120
Quarter-sized sample 7120 13120 12120 20/20 17120

sample is used for the estimation. Among the parametric methods, the
highest proportion of significant reductions in accuracy based on the
mean squared error was 5 out of 20 when the quarter-sized sample was
used to estimate the unconstrained hedonic model. When the mean abso-
lute prediction error is used as the criterion of accuracy, reduction of
sample size tended to have a greater effect on the predictive accuracy of
all methods. But the effect on the parametric methods was again less than
the effect on the nonparametric methods, and the repeat sales method was
least affected by the reduction in sample size.

5. CONCLUSION

Our comparison of methods for estimating appreciation rates allows us

to draw some general conclusions about their relative accuracy. Overall,
the parametric methods were more accurate than nonparametric meth-
ods. Between the two nonparametric methods we tested, the mean sales
price method was surprisingly more accurate than the commonly used
median sales price method. The judgment about the relative accuracy of
the three parametric methods that we tested depends crucially on the
criterion of accuracy. When the mean squared prediction error was used
as the criterion of accuracy, the only evidence of a statistically significant
difference in accuracy was between the repeat sales and the constrained
hedonic method, with the constrained hedonic method being the more
accurate. When the mean absolute prediction error was used as the crite-
rion, the repeat sales method was more accurate than the two hedonic
methods at the 0.05 level of significance, and the constrained hedonic
method was statistically more accurate than the unconstrained hedonic
338 CRONE AND VOITH

method at the 0.05 level of significance. Finally, reducing our estimating

sample to one-half and to one-quarter the original size significantly af-
fected the accuracy of the nonparametric methods more frequently than
the parametric methods.
The major implication of this article for empirical research is that,
ceteris paribus, parametric methods should be used to estimate house
price appreciation. Reliance on the median sales price method is espe-
cially questionable. Since sample size has an important effect on the
accuracy of most methods, however, a consideration of sample size may
determine which method to use. But the parametric methods were least
affected by reducing sample size in the experiments we performed.

REFERENCES

ABRAHAM, J. M., AND SCHAUMAN, W. S. (1991). “New Evidence on House Prices from
Freddie Mac Repeat Sales,” Amer. Real Estate Urban Econ. Assoc. J. 19, 333-352.
BAILEY, M. J., MUTH, R. F., AND NOURSE, H. 0. (1963). “A Regression Method for Real
Estate Price Index Construction,” J. Amer. Statist. Assoc. 58, 933-942.
CASE, B., POLLAKOWSKI, H. O., AND WACHTER, S. M. (1991). “On Choosing among House
Price Index Methodologies,” Amer. Real Estate Urban Econ. Assoc. J. 19, 286-307.
CASE, B., AND QUIGLEY, J. M. (1991). “The Dynamics of Real Estate Prices,” Reu. Econ.
Statist. 73, 50-58.
CASE, K. E., AND SHILLER, R. J. (1987). “Prices-of Single Family Homes Since 1970: New
Indexes for Four Cities,” New Eng. Econ. Rev. September/October, 45-56.
CASE, K. E., AND SHILLER, R. J. (1989). “The Efficiency of the Market for Single-Family
Homes,” Amer. Econ. Rev. 79, 125-137.
CLAPP, J. M., GIACCOTTO, C., AND TIRTIROGLU, D. (1991). “Housing Price Indices Based
on All Transactions Compared to Repeat Subsamples,” Amer. Real Estate Urban Econ.
Assoc. J. 19, 270-285.
DIEBOLD, F. X., AND MARIANO, R. S. (1991). “Comparing Predictive Accuracy I: An
Asymptotic Test,” Department of Economics, University of Pennsylvania, mimeo.
HAURIN, D. R., AND HENDERSHOTT, P. H. (1991). “House Price Indexes: Issues and
Results,” Amer. Real Estate Urban Econ. Assoc. J. 19, 259-269.
HENDERSHOTT, P. H., AND THIBODEAU, T. G. (1990). “The Relationship between Median
and Constant Quality House Prices: Implications for Setting FHA Loan Limits,” Amer.
Real Estate Urban Econ. Assoc. J. 18, 323-334.
MARK, J. H., AND GOLDBERG, M. A. (1984). “Alternative Housing Price Indices: An Evalu-
ation,” Amer. Real Estate Urban Econ. Assoc. J. 12, 31-49.
MEESE, R. AND WALLACE, N. (1991). “Nonparametric Estimation of Dynamic Hedonic
Price Models and the Construction of Residential House Price Indices,” Amer. Real
Estate Urban Econ. Assoc. J. 19, 308-332.
PALMQUIST, R. B. (1980). “Alternative Techniques for Developing Real Estate Price In-
dexes,” Rev. Econ. Statist. 62, 442-448.
THIBODEAU, T. G. (1989). “Housing Price Indexes from the 1974-83 SMSA Annual Hous-
ing Surveys,” Amer. Real Estate Urban Econ. Assoc. J. 17, 110-I 17.
VOITH, R. P., (1993). “Changing Capitalization of CBD Oriented Transportation Systems:
Evidence from Philadelphia 1970-1988,” J. Urban Econ. 33, 361-376.