Location, location, location: The 3L Approach to house price determination

The immobility of houses means that their location affects their values. This explains the common belief that three things determine the price of a house: location, location, and location. We use this notion to develop the 3L Approach to house price determination. That is, prices are determined by the Metropolitan Statistical Area (MSA), town, and street where the house is located. This study creates a unique data set based on data from the American Housing Survey (AHS) consisting of small 'clusters' of housing units with information on structure and resident characteristics that is merged with census tract-level attributes. We use these data to test the 3L Approach: we find that all three levels of location are significant when estimating the house price hedonic equation. This indicates that the concept of “neighborhood” is multifaceted; individuals care about their very local surroundings such as the general upkeep of their street and possibly their neighbors' characteristics (cluster variables), and a broader area such as the school district and/or the town that accounts for school quality and crime rates (tract variables). We show that price indices and evidence of discrimination and prejudice in the housing market are affected if all three levels of location are not included in the house price hedonic model.