Journal of Real Estate Finance and Economics, 22:2/3, 203±219, 2001
# 2001 Kluwer Academic Publishers. Manufactured in The Netherlands.
Environmental Conditions, Reservation Prices, and
Time on the Market for Housing
Department of Economics, University of New Hampshire, Durham, NH 03824
RAYMOND B. PALMQUIST
Department of Economics, North Carolina State University, Raleigh, NC 27695
A general analytical model to describe the impact of environmental disamenities on duration of sales is derived. A
statistical technique to recover a seller's reservation price is proposed. An econometric procedure that
consistently estimates market duration and a seller's reservation price is described. An application to the impact
of highway noise on property values and market duration is presented. The estimation results show that, while
highway noise has a signi®cant negative impact on forming reservation prices and predicting sale prices, the noise
effect on duration of sales is not statistically signi®cant. Empirical evidence also shows a negative impact of
market duration on reservation prices, which indicates an updating process for reservation prices over time.
Key Words: hedonic method, property values, environmental disamenity, market duration, reservation price,
One of the traditional revealed preference methods to value environmental resources is the
hedonic method. Environmental amenities or disamenities are housing characteristics that
in¯uence property values. Beginning with Ridker and Henning (1967), there have been
numerous studies on the relationship between property values and environmental quality.
Smith and Huang (1995) have recently presented a meta-analysis of the many hedonic
studies of air pollution and property values. They ®nd that in general air pollution has a
negative effect on property values. Nelson (1982) reviews nine studies of the impact of
highway noise on property values and selling time. He concludes that noise has a
signi®cant impact on property values but that there is no signi®cant noise effect on selling
time. This would support the underlying mobility assumption of the hedonic price model.
That is, with suf®cient mobility, the value of the characteristics of a house should be fully
capitalized into the price of the property. A few other studies have investigated the impact
of environmental conditions on selling time. It is well recognized that there is a tradeoff
between an acceptable price and the waiting time to sell (Haurin, 1988; Horowitz, 1992;
Asabere and Huffman, 1993). However, all the previous housing-market studies have
examined the environmental impact either on property values or on selling time. The
simultaneous determination of sale price and time to sell is overlooked in estimating