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The Journal of Real Estate Finance and Economics

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20-12-2019

Real Estate Dictionaries Across Space and Time

Authors: Adam D. Nowak, Bradley S. Price, Patrick S. Smith

Published in: The Journal of Real Estate Finance and Economics | Issue 1/2021

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Abstract

Leveraging high-dimensional variable selection methods, we show the textual information provided in real estate agents’ remarks about a property can be used to address spatial and temporal heterogeneity in housing markets. Including the textual information in the pricing model decreases in-sample prediction errors by as much as 18.7% at the MSA-level and 39.1% at the zip code level. These results are robust to transforming the raw text using a real estate specific word list, the choice of n-grams, word stemming, and heteroscedasticity in the hedonic and repeat-sales models. These findings suggest the raw text in the remarks can be included directly in predictive pricing models.

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For example, Sirmans et al. (2006) run a meta analysis that examines the relationship between house prices and nine housing characteristics that are commonly included in hedonic pricing models. The authors find the estimated coefficients for some characteristics vary significantly by geographical location, but not across time.

For example, vice and crude are negative in everyday use but neutral when referring to vice president or crude oil in 10-K reports.

The phrase “realtor speak” is analogous to the phrase “netspeak” in Crystal (2001) which refers to abbreviations and acronyms that are often used on the internet to speed up the typing of messages.

Throughout the paper we emphasize the importance of transparency when performing the transformation, tokenization, and variable selection processes. For this reason, we provide the word lists and an R package that performs the variable selection processes employed in this paper.

The authors of this study spent more than 50 hours manually identifying realtor speak in the public remarks for one city (Atlanta).

The decision to use the textual information to manually filter the data may have been partially driven by the small sample size (347 repeat-sales pairs) in their study.

The penalty on g implies LASSO is not invariant to linear transformations of the w_nt,k. In order to remove this invariance and without loss of generality, LASSO (i) normalizes each w_nt,k to have unit variance, (ii) solves for the associated standardized beta coefficients, and (iii) undoes this normalization.

Define the set of strong predictors as the set of all predictors that have a sufficiently large effect size (Bühlmann and Van De Geer 2011). Given that these tokens are not highly correlated (i.e. the tokens are not interchangeable), \(\hat {S}\) will contain all tokens that are strong predictors of p_nt with high probability. This may also be viewed as a variable screening technique for hedonic models.

We use the wordStem function in the SnowballC package in R to stem each version of the remarks.

The traditional repeat-sales methodology in Bailey et al. (1963) and Case and Shiller (1989) uses differenced sale prices as the dependent variable to create home price indexes. When including property fixed effects we use the log of the level sale price as the dependent variable. The two approaches produce identical results when each house sells exactly twice. Nowak and Smith (2019) demonstrate how textual information can be incorporated using the traditional repeat-sales methodology to create quality-adjusted home price indexes.

Nowak and Smith (2019) use textual analysis to show local (zip code level) home price indexes are biased under the constant quality assumption. However, the repeat-sales methodology employed in Nowak and Smith (2019) mitigates the spatial heterogeneity we are interested in documenting in this section.

The Internet Appendix provides results showing our approach also improves out-of-sample predictive performance over time. Not surprisingly, the improvements to the out-of-sample predictive performance over space are much more modest due to the highly localized nature of real estate markets.

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Title: Real Estate Dictionaries Across Space and Time
Authors: Adam D. Nowak
Bradley S. Price
Patrick S. Smith
Publication date: 20-12-2019
Publisher: Springer US
Published in: The Journal of Real Estate Finance and Economics / Issue 1/2021
Print ISSN: 0895-5638
Electronic ISSN: 1573-045X
DOI: https://doi.org/10.1007/s11146-019-09740-w

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