Nonparametric assessment of the effects of neighborhood land uses on residential house values

The effects of land uses on residential property values are crucial when ev aluating costs and benefits of land projects for the purpose of public poli cy prescription or business decision making. It is widely recognized that a nuclear plant or a prison, for example, may often have an adverse effect o n the property values of the nearby houses, while a park, a museum, or a un iversity usually has a beneficial effect. The effect of a land use defined as a function of distance between the locations of the land use factor and a particular house is, however, inherently nonlinear (in an unknown form) a nd the use of a simple linear regression method could lead to a misleading conclusion. The purpose of this paper is to estimate the land use effect fu nction by using the recently developed techniques of the nonparametric regr ession method. There are three important features of our statistical model. First, it is a semiparametric model, which keeps a conventional linear for m with respect to the dwelling attributes of the house just like in the pop ular hedonic model, but treats its location characteristics in a nonparamet ric fashion using the kernel method (Robinson 1988). Second, unlike the usu al nonparametric regression, it keeps additive structure in the nonparametr ic component (Hastie and Tibshirani 1986, 1990), so that it retains much of the interpretative features of the linear models. Third, it uses the local linear smoother developed by Fan (1992, 1996), which is superior to other smoothers in terms of avoiding the boundary effect and other features. We e stimate the effects of three land use factors: (1) golf courses, (2) a univ ersity, and (3) a nitrogen plant on the neighborhood home values in Lawrenc e, Kansas. The data on the sales price and other attributes of the house wi th 6,400 observations over the period from 1986 to 1995 are obtained from t he Douglas County Appraisal Office and the data on distance to the three si tes above are constructed using the Geographic Information System (GIS).