Felt but Unseen: The Lesser-Known Forces Influencing Home Prices

When a house sells on the open market, it's easy to view the transaction price as capturing, rather bluntly, the economic value of the physical property itself — the wood, the bricks, the mortar, the land — and little else. However, as scholarly research has maintained for decades, a home's price is better depicted as a bundle, reflecting not just the home's physical traits but also the amenities it provides access to, such as proximity to a city center, environmental cleanliness, and a good school district. But just how are such amenities incorporated into the home's price? In economics terminology, how are amenities capitalized?

According to standard econometric models, amenities are typically capitalized in proportion to a house's size and other characteristics. But in a sweeping analysis of home-price composition, two economists encourage us to regard amenity capitalization as a so-called ticket price: a fixed, flat price that all households pay regardless of home size, household wealth, or other factors. (In this sense, a ticket price can be thought of as an entry fee per household to a given neighborhood.) Ticket prices can impose remarkably consistent pricing because the premium for a high-amenity area contains a component that is constant for all home sizes. For a typical high-amenity neighborhood they analyzed, amenity premia held steady across homes of different sizes: Very small homes commanded an amenity price of $24,500, whereas much larger (and pricier) houses were subject to a ticket price of $28,700. Thus, the amenity price grows slightly as houses become bigger and more expensive, but it nonetheless remains relatively stable.

In their paper, “Capitalization as a Two-Part Tariff: The Equilibrium Structure of Housing Prices,” H. Spencer Banzhaf and Kyle Mangum write that they intend to make a meaningful contribution to 70 years' worth of scholarly investigations that have “provided tremendously important insights and sparked fruitful debates.”¹ However, they argue that previous research could be clearer about “the specific factors that generate tickets,” and they set out to unpack the components of home prices in a novel way.

First, they used transaction histories derived from public records (through a special data-aggregation service provided by the Federal Reserve System) to amass a data set of single-family home sales. These sales occurred between 2005 and 2012 in 20,000 U.S. neighborhoods (defined by school attendance zones) spanning 140 metro areas. Each sale in the data set includes information on the property's size, location, square footage, number of rooms, and year built.

Next, they identified local amenities at the neighborhood level. They collected data that reflected each neighborhood's distance from a central business district, measures of environmental health (such as proximity to toxic waste sites), and access to quality schools (as measured by student achievement scores on statewide exams).² By combining their sales information with information on local amenities, the authors could model how the two are related, and how amenities affect prices.

In their study, Banzhaf and Mangum followed an approach that combines their own simulations with analysis of observed developments in real-world housing markets. Their simulations illustrate home-price behavior under several scenarios, including one in which there are no land-use restrictions, one in which there is a minimum lot-size requirement, and one in which zoning regulations limit the total number of lots available for development. The simulations generate strong evidence, particularly in the third scenario, of the emergence of tickets — a flat price of admission into the neighborhood, as noted above, that is paid by all households. This finding, the authors demonstrate empirically, is likewise borne out by home-price behavior observed in their collection of real-world market data. Taken together, the results confirm that when neighborhoods are subject to limitations on housing density, amenities are more prominently capitalized via tickets.

Interestingly, this finding does not hold when lots are subject to size minimums. Rather, the effects on pricing are stronger when conditioned on the number of lots. Banzhaf and Mangum document other such frictions on housing markets, including those that arise from a little-considered source: the passage of time. “If a neighborhood was developed in the more distant past,” they write, its housing supply “is more likely to be farther from the allocation [that would currently be] optimal.” In these neighborhoods, one might say, an older housing stock has created its own kind of friction.

The authors' models also help them identify how much homebuyers are willing to pay (that is to say, what ticket price they will tolerate) for one amenity in particular: quality schools. The neighborhoods in their study are defined by elementary school attendance zones, providing a natural sample with which to assess the ticket price of schools across neighborhoods. Banzhaf and Mangum closely follow the contours of school-zone maps, measuring price sensitivities on either side of the school-zone border. “By narrowing the analysis to a small band [of homes] around a sharp, discontinuous change in the amenity,” they show how neighboring school zones can have different ticket prices.

They arrive at their results by using actual observed data to model the effects of raising a school zone's quality and comparing the outcomes between standard pricing models (in which ticket pricing does not exist) and their preferred models (in which tickets play a role). The results are revealing. The spread in how much households are willing to pay for good schools is considerably wider in more traditional pricing models, whereas it is rather narrow in ticket-inclusive models. In the latter, where ticket prices are, by definition, the same for all households, the estimated willingness to pay of a household in the 75th percentile of house size is only 17 percent more than that of a household living in the 25th percentile of house size.

This finding brings the authors to a compelling discovery: Households living in smaller homes are more willing to pay for fundamental amenities (such as good schools) than previously reported in the research literature. When households in smaller homes are portrayed as less willing to pay for quality schools, the portrayal likely reflects assumptions imposed by a legacy model. The authors' newer models show that this relationship is more nuanced than previously thought.

In “Capitalization as a Two-Part Tariff: The Equilibrium Structure of Housing Prices,” Banzhaf and Mangum show the remarkably strong influence of tickets on housing prices. Indeed, amenities appear to be folded into transaction prices consistently across several iterations of their models. Through their modeling techniques and the resulting simulations, the authors reframe the behavior of housing prices, vividly portraying the elements that are bundled into them. The results unearth price components that often go unseen, providing housing analysts with new perspectives on how different types of households respond to different levels of home prices. Their findings are also significant for policymakers, who may be surprised to learn that limits on housing density tend to result not just in higher home prices in general (especially in amenity-rich neighborhoods) but also in higher levels of amenity capitalization through tickets.