A finite mixture approach for household residential choices

In the housing sector, on the demand side, attempts to characterize the nature of housing demand have been primarily implemented through hedonics whereby hedonic price functions relate market value to residential housing stock. Hedonic price models, however, do not identity sub-markets and thus may represent the workings of housing market and the valuation of amenities and dismaenties in a housing market. Identification of sub-markets allows us to have a more precise and reliable understanding of housing markets in general The challenge then becomes how to identify market segments and impute the marginal value of housing characteristics in different market segments. In this paper, I will attempt to identify and delineate residential sub-markets in an array of residential stock demand and derive the predicted marginal value of attributes of housing stock within all sub-markets. These sub-markets can be thought of composing a homogenous ‘type’ of households. Typing households in a statistically is a useful way of accounting for preference and utility differences in a structurally sound manner that offers deeper insight into the welfare of consumers of residential stock. I accomplish the typing of households by implementing a finite mixture model which gives a probability distribution of an individual household being a particular type. The model best fitted the array of households into two types. The types exhibited differences in their attitudinal and demographic characteristics.