Functional Form and Rental Housing Market Analysis

Abstract

This paper tests functional form for hedonic rent regressions and for rental housing demand regressions for 19 United States metropolitan areas. In the hedonic rent regressions, both linear and loglinear forms are rejected through Box-Cox maximum likelihood procedures. Similar tests for demand regressions also reject both linear and loglinear forms. These results have useful applications to the analysis of rental housing demand by low income households. The more popular logarithmic and linear forms lead to very low estimated income elasticities for households in the low income range, whereas the preferred form provides elasticities that are significantly higher. This implies greater responsiveness to income subsidies than might otherwise be estimated.