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Who Picks the Variables?

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In the regression example we just saw, we used lot

size (the independent variable) to estimate selling
price.

How was lot size (or any other variable in a model)

chosen to be included in the model?

Whoever builds the model makes that decision. The

logic is the same as in a traditional appraisal; that is,
in this case you have a theory that lot size is closely
associated with price. Perhaps your theory is based
on what you have read about price setting, or
perhaps it is based on your prior experience. In other
words, you put into your model those independent
variables you think are necessary to explain the
dependent variable as fully as possible.

For example, if you were assigned to build a model to

explain and predict the values of single-family houses
in a market you are familiar with, what variables would
you include? Probably things like square feet,
location, number of bedrooms, and so forth. If you live
in Florida, you might also include whether or not the
property has air conditioning. If you live in Maine, you
might include whether or not there is a fireplace. In
other words, the model should mirror market
behavior, and those things that you believe have a
non-trivial impact on value should be included. To
illustrate, we’ll be working through a house price
regression shortly. The key point here, however, is
that you build your regression model using the same
logic you use when choosing comparable sales.
Variables that are important factors in determining
value are the basis for both.

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