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arXiv · 2508.03156

Unveiling Location-Specific Price Drivers: A Two-Stage Cluster Analysis for Interpretable House Price Predictions

Paul Gümmer·Julian Rosenberger·Mathias Kraus·Patrick Zschech·Nico Hambauer
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Abstract

House price valuation remains challenging due to localized market variations. Existing approaches often rely on black-box machine learning models, which lack interpretability, or simplistic methods like linear regression (LR), which fail to capture market heterogeneity. To address this, we propose a machine learning approach that applies two-stage clustering, first grouping properties based on minimal location-based features before incorporating additional features. Each cluster is then modeled using either LR or a generalized additive model (GAM), balancing predictive performance with interpretability. Constructing and evaluating our models on 43,309 German house property listings from 2023, we achieve a 36% improvement for the GAM and 58% for LR in mean absolute error compared to models without clustering. Additionally, graphical analyses unveil pattern shifts between clusters. These findings emphasize the importance of cluster-specific insights, enhancing interpretability and offering practical value for buyers, sellers, and real estate analysts seeking more reliable property valuations.

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Paul Gümmer, Julian Rosenberger, Mathias Kraus, Patrick Zschech, Nico Hambauer. 2025-08-05. Unveiling Location-Specific Price Drivers: A Two-Stage Cluster Analysis for Interpretable House Price Predictions. https://arxiv.org/abs/2508.03156

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