Journal of Real Estate Finance and Economics, 29:2, 149±166, 2004
# 2004 Kluwer Academic Publishers. Manufactured in The Netherlands.
The Dynamics of Location in Home Price
ALAN E. GELFAND
Institute of Statistics and Decision Sciences, Duke University, Durham, NC 27708-0251, U.S.A.
MARK D. ECKER
Department of Mathematics, University of Northern Iowa, Cedar Falls, IA 50614-0506, U.S.A.
JOHN R. KNIGHT
Eberhardt School of Business, University of the Paci®c, Stockton, CA 95211, U.S.A.
C. F. SIRMANS
Department of Finance, University of Connecticut, Storrs, CT 06269, U.S.A.
It is well established that house prices are dynamic. It is also axiomatic that location in¯uences such selling prices,
motivating our objective of incorporating spatial information in explaining the evolution of house prices over
time. In this paper, we propose a rich class of spatio-temporal models under which each property is point
referenced and its associated selling price modeled through a collection of temporally indexed spatial processes.
Such modeling includes and extends all house price index models currently in the literature, and furthermore
permits distinction between the effects of time and location. We study single family residential sales in two
distinct submarkets of a metropolitan area and further categorize the data into single- and multiple-transaction
observations. We ®nd the spatial component is very important in explaining house price. Moreover, the relative
homogeneity of homes within the submarket and the frequency with which homes sell affects the pattern of
variation across space and time. Differences between single and repeat sale data are evident. The methodology is
applicable to more general capital asset pricing when location is anticipated to be in¯uential.
Key Words: geostatistical modeling, hedonic models, index construction, spatio-temporal process
The components of house prices and period-to-period changes in house prices are subjects
of both academic and practical interest. The hedonic pricing model, dating to Court (1939)
and having Rosen (1974) as its basis in theory, is customarily employed to measure the
contribution of individual house characteristics to the overall composite value of the
housing asset. Location, usually considered the most important of house characteristics,
was the topic of many early applications of the hedonic technique to housing data (e.g.,
Ridker and Henning, 1967), and specifying a property's spatial characteristics within the
error structure of pricing models is the subject of considerable recent research effort (e.g.,
Dubin, 1988; Basu and Thibodeau, 1998; Pace and Gilley, 1998). The hedonic model has