The Use of Multiple Regressions in Determining Selling Prices of Homes

Alicia Kuzia August, 23, 2007 I. Executive Summary Multiple regression analysis is used to test hypotheses about the relationship between a dependent variable, Y, and two or more independent variables, Xs. Multiple regression can also be used to make predictions about the Y variable. That is why this statistical technique is useful in determining a propertys likely sales price or worth. Using this analysis we can designate values to each of the variables. Using the values we can then break down how much each variable contributes to the price of a house. This will help you determine what you should set as a selling price for the home. II. Introduction Multiple regression allows us to explore the relationship between several independent or predictor variables and a dependent or decisive variable. Real estate agents can use multiple regression procedures to determine how much a home should sell for. One can determine a number of factors or dimensions such as "number of bedrooms", location of home, or "square footage" that is believed to contribute to the value of a home. When this type of information is complied for various houses, you can see how these factors relate to the price a house is sold for. For example, one might find that in the same neighborhood the number of bathrooms is a better predictor for what the house will sell for versus the esthetics of the house. The selling price of a house in Eastville, Oregon is a function of the amount of square footage, number of bedrooms, number of bathrooms, type of heat, architectural style, if it has a garage, the age of the house, and if it has a fireplace. The hypothesis should be expressed in the form of a linear function as follows:

Y = B0 + B1x1 + B2x2 + B3x3 + B4x4 + B5x5 + B6x6 + B7x7 + B8x8 + B9x9 + B10x10 + E OR Y = Price Y = B0 + B1(Square Footage) + B2(Beds) + B3(Baths) + B4(Heat) + B5(Style) + B6(Garage) + B7(Basement) + B8(Age) + B9(Fireplace) + B10(School) + E

E is known as the random error term. We assume that the actual value for E for a given house is the result of a random draw from a normal distribution with mean zero and variance o2. Each house gets its own random draw from the normal distribution. In other words, the actual selling price of a house depends upon the variables and its own random error. This random error term can be interpreted as summarizing a large number of other factors that influence selling price, but for which we have no data. For example, how quickly did the seller need to sell? How quickly did the buyer need to buy? Does the kitchen have granite countertops? Is the roof pretty new, or is it old? Do the rooms have hardwood floors? We assume that all of these other factors can be summarized in this one random effect. Samples of 108 houses in Eastville, Oregon were used to make up the data for this case study. This data will help the seller determine what they should list their home for. The variables are measured as follows:

VARIABLE

MEANING

PRICE SQUARE FOOTAGE BEDS BATHS

selling price in thousands total square feet in the house number of bedrooms number of bathrooms

HEAT STYLE GARAGE AGE FIRE BASEMENT SCHOOL

0=gas forced air heating; 1=electric heat the architectural style of the home: 0=trilevel, 1=two-story, 2=ranch-styled number of cars that can fit in garage age of the home in years 0=no fireplace present; 1=at least 1 fireplace present 0=no basement; 1=basement 0=Eastville school district; 1=Apple Valley school district

The "fire" variable is an example of what is called a "dummy variable". It equals 1 if the feature is present (fireplace in the house), and equals 0 if the feature is absent. Holding all other variables constant, we can estimate that the average value of Y changes by B1 units for each 1 unit increase in X. According to http://www.statsoft.com/textbook/stmulreg.html we lose a degree of freedom as each when a new X variable is added. Additional variables that could affect the price of a house include: Are the appliances included with the house? , Is the house is up to code? , Is there new wiring or other maintenance performed on the house? , and Does the house have additional amenities such as a pool or deck?

III. Analysis and Methods Section Descriptive statistics

PRICE 108 97.99226

count mean

Regression Analysis
R Adjusted R R Std. Error 0.826 0.808 0.909 11.594 n k Dep. Var. 108 10 PRICE

ANOVA table Source Regression Residual Total

SS 61,703.8105 13,037.8312 74,741.6417

df 10 97 107

MS 6,170.3811 134.4106

F 45.91

p-value 2.21E-32

Regression output variables Intercept SQ_FT BEDS BATHS HEAT STYLE GARAGE BASEMENT AGE FIRE SCHOOL coefficients -15.2124 0.0376 4.9237 -2.9115 -12.9097 2.2877 15.7593 9.0772 -1.0342 5.3054 4.6217 std. error 9.8179 0.0036 1.9647 3.0240 6.1009 1.6437 3.8246 3.4454 0.2813 3.9794 2.5341 t (df=97) -1.549 10.365 2.506 -0.963 -2.116 1.392 4.121 2.635 -3.676 1.333 1.824 p-value .1245 2.19E17 .0139 .3380 .0369 .1672 .0001 .0098 .0004 .1856 .0713

confidence interval 95% 95% lower upper -34.6982 4.2734 0.0304 1.0244 -8.9132 -25.0184 -0.9746 8.1686 2.2390 -1.5925 -2.5927 -0.4079 0.0448 8.8231 3.0902 -0.8010 5.5501 23.3501 15.9154 -0.4758 13.2035 9.6513

The mean price for our housing data is 97.99226 (in thousands) or $97,992. R Squared refers to the percentage of the variation in price that is explained by the multiple regression analysis. If X and Y are perfectly related then there is no residual variance and the ratio of variance would be 0.0. In most cases, the ratio would fall somewhere between these extremes, that is, between 0.0 and 1.0. 1.0 minus this ratio is referred to as R-square or the coefficient of determination. In other words, given the variables you can account for 82.60% of the variance in price. The coefficient on square footage of 0.0376 says that one more square foot of space adds $3.76 to the selling price of a house. So an additional 200 square feet adds $752 in value. Rounding up to the nearest dollar, a garage increases the selling price by an additional $1,576.

The fireplace variable has a coefficient of 5.3054 which, adds $530.54 to the asking price. Each variables coefficient states the amount of value it adds to the house price. Using these numbers we can plug them into the linear equation to determine the price of each house. For example, a 12 year old trilevel home with square footage of 1,238 that has 3 bedrooms, 2 baths, gas forced air heating, with a garage, basement, fireplace, and is in the preferable school district would have a predicted value of :
95% Confidence Intervals 95% Prediction Intervals

Predicted 62.632917

lower 53.248434

upper 72.017400

lower 37.782788

upper 87.483046

Leverage 0.166

Each estimated coefficient has a T Value, which is the ratio of the coefficient to its estimated standard error. The T Value tests the hypothesis that the coefficient of the variable in
question is actually zero. A T Value of 2 or greater means that we reject that hypothesis. The actual coefficient is not zero. Therefore, the variable in question belongs in the function for price.

The data was collected from a sample of houses that were sold in the area. This allows us to work with variables and prices that are true to the market area. We can analyze this data and determine a reasonable asking price for the home. The asking price would be based on what comparable homes in the area sold for.

IV. Conclusion and Summary General data is information related to environmental, social, economic and governmental trends in the local market area (http://business.fullerton.edu/finance/jrepe/pdf/2004Vol7). These include, but are not limited to, land use constraints, demographic changes, supply/demand factors

and zoning changes. Specific data include such things as property location and improvements. Data for these various attributes allow comparison of the subject property to the other recent property sales. The analysis has shown us what variables drive the price of a home. In this case, variables that impact the selling price most include: square footage, number of bedrooms, number of bathrooms, if there is a garage, and the type of heating system. Using this information a seller can estimate a realistic selling price. This analysis was done to determine weather the seller could come up with a reasonable asking price on their own or if they needed to employ a real estate agent. Based on the analysis it is reasonable for the seller to come up with an asking price on their own. Since gaining market exposure is essential in selling a home, they still may consider paying the commission fee and hiring a real estate agent. A real estate agent will be able to provide potential buyers for the home. An agent will also have more advertising expertise which in turn will allow for more exposure. Doing this analysis taught me that various components of a house increase or decrease the selling price of a house. This type of data is useful in determining an asking price for a home. Using the multiple regression table results allow us to see how each of the pieces of data impact price. Not all variables have the same value. Each variable carries a specified value to the home. After reviewing this data, the seller may find that a few home improvements could dramatically increase the asking price. The data allows the seller to decide what type of improvements would be most beneficial. References Baldwin, P. N., Statistics: Know-How Made Easy, LmIT Publishing Co., 1999.

http://business.fullerton.edu/finance/jrepe/pdf/2004Vol7N2/06.65_78.pdf http://www.co.douglas.co.us/assessor/documents/MultipleRegressionAnalysis.pdf http://ordination.okstate.edu/MULTIPLE.htm http://www.statsoft.com/textbook/stmulreg.html#cthe

Appendix Data Used in Multiple Regression Analysis

SQ_FT 1238 1707 1296 1320 1210 1296 1765 1725 1794 1294 1372 1162 1996 1764 1416 1730 1392 1664 1332 1752 2167 1664 1973 1384 1431 1950 1452 1829 1652 BEDS 3 3 4 3 3 3 3 4 4 3 3 3 4 4 3 4 3 3 3 3 3 3 4 3 3 5 3 3 4 BATHS 2 2 2 2 2 2 2 3 2 2 2 2 2 2 2 2 2 3 2 3 3 2 3 2 2 3 2 2 3 HEAT 0 1 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 STYLE 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 GARAGE 1 2 2 2 1 2 2 2 2 2 2 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 BASEMENT 1 0 1 1 0 1 1 1 1 0 1 0 0 1 0 0 1 0 1 0 1 0 0 0 1 0 1 0 1 AGE 12 13 17 11 6 17 20 12 18 13 9 8 13 13 8 15 8 11 14 18 13 9 13 5 7 13 4 10 7 FIRE 1 1 0 1 1 1 0 0 0 1 0 1 1 1 0 1 1 1 0 1 1 1 1 1 1 1 1 1 1 SCHOOL 1 0 0 0 0 0 0 0 0 0 1 0 1 0 1 0 1 0 1 0 0 0 0 0 1 0 0 1 1 PRICE 59.9 64 66.5 66.5 66.9 68 68.5 69 70.95 71 72.692 72.801 75.207 76 76 77.5 79.9 79.9 81 82.8 84.9 85 86 89.28 89.9 90 92 92.439 94.646

1516 1998 1984 1840 1823 2150 2096 2212 2375 2809 912 816 1008 912 1008 838 1008 1120 1242 912 1316 1490 1118 1278 1490 1418 1250 1881 1355 1518 1606 2124 2099 2232 1608 1320 1680 1434 1664 1379 1634 1400 1664 1548 2040 1792 1865 1833 1627 2198

3 4 4 3 4 5 3 4 4 4 4 3 5 4 5 4 4 3 4 4 3 3 4 3 3 4 4 4 3 3 4 3 4 5 5 3 3 3 3 3 3 3 4 3 4 4 3 3 3 4

2 3 3 3 3 3 3 3 3 3 2 2 2 2 2 2 3 2 3 2 2 2 3 2 2 2 3 3 2 2 3 2 3 3 3 2 3 3 2 2 3 3 4 3 3 3 3 3 3 3

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

2 2 2 2 2 2 2 3 2 3 2 2 2 2 2 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 3 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 1 1 1 1 0 1 1 1 1 1 1 1 1

10 17 9 9 3 12 9 17 11 6 19 19 17 16 17 11 19 11 12 18 8 13 16 11 10 14 17 9 7 22 13 14 13 9 13 13 7 12 7 8 10 1 16 8 15 9 12 7 3 12

1 1 1 1 1 1 1 1 1 1 1 0 0 1 1 0 1 1 0 1 1 1 1 1 1 1 1 1 1 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

1 1 0 0 1 0 1 1 1 0 0 0 0 1 0 1 0 1 0 1 0 0 1 0 1 1 1 1 1 1 0 0 1 1 1 1 1 1 1 1 1 1 1 1 0 1 0 1 1 0

97.293 98.1 98.149 105 110 111.9 113 124 133 195 59 61.5 63.5 66.95 68 68.694 69 70.452 75 76.9 83 88 88.879 89.347 89.7 90 90.8 91.5 95 98 99.5 107 113.75 125 132 76 79.9 79.9 85 87.158 87.2 91.5 91.5 92.5 93.5 94 96.7 97.4 98.5 99

1707 2096 2004 1818 1935 2381 1977 2317 2072 2108 2060 2064 2148 2170 1984 2130 2049 2035 2264 2264 2362 2262 2353 2298 2282 2542 2380 2505 2804

3 3 4 4 3 3 3 5 4 3 4 3 5 6 4 4 4 3 3 3 4 5 4 3 4 4 4 4 4

3 3 3 3 3 3 3 3 3 3 4 3 4 4 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3

0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0

2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 3 3 3 2 2 2 3 2 2 2 2 3

1 1 1 1 1 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

12 7 13 19 11 17 9 9 11 7 9 5 8 21 11 20 19 6 7 10 6 12 5 2 9 6 6 7 1

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

0 1 0 1 1 1 1 1 1 0 1 1 1 1 1 1 1 1 1 1 0 1 0 1 1 1 1 1 1

99 102.4 104 107 107.9 109 110 110.5 112 112.9 113.6 114.5 114.7 115 121 121 125 128 130 131 132 132.5 132.5 144.5 150.577 153.8 155 156.9 192