Dealing with Measurement Error in Real Estate Market Analysis: An Application to the Assessed Value Price Index Method
Applied researchers are aware that errors in measurement for one of the explanatory variables can reduce or eliminate the accuracy of conclusions from the research. In real estate market analysis, this issue is prominent in two areas: (1) the evaluation of the accuracy of property tax assessments and (2) The assessed value method for house price index construction. This chapter proposes practical methods for dealing with measurement error as applied to these two areas.
Econometricians often focus on inferences about parameters of variables measured without error. However, even one variable measured with error introduces bias and inconsistency to the estimates of interest. In this study, we point out that auxiliary regressions can be combined with other readily available information to diagnose the extent of any “smearing” from variables measured with error. We propose several strategies to obtain bounds on the bias and report an application where even in the presence of badly measured variables the extent of bias is relatively small.
KeywordsReal Estate Price Index House Price Instrumental Variable Sales Price
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