What Can We Learn From Hedonic Models When Housing Markets Are Dominated By Foreclosures?

Hedonic property value models have been frequently used to value environmental amenities (or dis-amenities) since markets for these goods (bads) do not usually exist. Typically, researchers cite Rosen’s (1974) seminal work that allows one to interpret functions of the hedonic regression coefficients as the marginal willingness to pay (MWTP) for the environmental good. A key assumption needed for the Rosen result to hold is market equilibrium. Recent years have witnessed extreme circumstances, such as wild swings in housing prices, high levels of mortgage default, and most significantly, high levels of foreclosure when this assumption is unlikely to hold. In this paper, we address the following question "How can we interpret the coefficient estimates for environmental goods in hedonic property value models where markets are dominated by foreclosures?" We then focus on housing market conditions when interpreting the hedonic literature on (airport) noise, Superfund sites, air quality, and flood risk * corresponding author: 8 Upper Campus Road, Tufts University, Medford MA 02155