Understanding Home Prices

Moses Gonzalez

California State University – Los Angeles

Table of Contents

Understanding Home Prices

Analytical Section

Statistical Model/regression Equation

Data Source

References
 Understanding Home Prices

Buying a home can be a difficult process. Not only do you have to find a home you are

willing to live in for the next few years of your life, but you must find one that will not leave you

living check to check. When searching for a home it can be quite alarming to see a one-bedroom

home have a higher price point than one with more bedrooms, but what exactly determines the

worth of a home? According to an article by Rio Herbik, “the home itself will impact the market

value. Bigger homes with more bedrooms, bathrooms, and usable living spaces command higher

prices” (2022). Further into the article, it mentions that so much of the houses value is impacted

by the quality and quantity of certain characteristics. Many real estate agencies use a model to

determine the value of a home called “Competitive Market Analysis” (Herbik, 2022), this model

will access several things to ultimately provide an estimate for potential buyers and sellers. In

many cases, some homes do not have the same price points as those nearby or with similar

features. This inconsistency is what makes the process more daunting and difficult for many

looking to buy.

In the study conducted in, “Determinants of House Prices: A Quantile Regressions

Approach,” there has been several empirical studies where the relationships between certain

characteristics and house price were uncertain and opposite of expected results (Ziets et al,

2008). Within this study, the researchers “put forth a number of housing characteristics to explain

house prices” in hopes of better understanding why “for more than 125 empirical studies [there is

often disagreement] on both magnitude and direction of effect of certain characteristic” (Ziets et

al, 2008). Attempting to alleviate a similar complexity within the housing market, the paper

theorizes that housing characteristics are not valued the same across house prices, further adding
to the confusion for market participants. To perform the study, they utilize both OLS and quantile

regressions on their data of over 1,366 homes in Utah. The results of this paper discuss the

possibility that variation of impact that key characteristics have on a house’s price cannot just be

explained by regional distinctions, but by other factors. The ending hypothesis is that

“higher-priced homes value certain housing characteristics such as square footage and number of

bathrooms differently from buyers of lower-priced homes” (Ziets et al, 2008).

To find a solution to the confusion of what really matters when identifying the value of a

home, I have collected individual data of 100 homes scattered around Los Angeles County.

These homes will be selected at random using Realtor.com, as this was found to be one of the

most accurate websites. The accuracy of the prices and details listed for their homes have been

run through over 580 databases nationwide. From this data I will run a multi-variable regression

using physical and economic characteristics of a home to determine their overall significance in

the home price. This would test all independent variables within one model to see the impact

they have on house price when compared to other factors.

Analytical Section

Subsequently, when thinking of an expensive home, we assume that it will have multiple

rooms, a pool, a garage, and open space. I identify a total of ten important variables within my

regression: population size (of given area), poverty rate (of given area), median income,

unemployment rate, age (of the home), number of bedrooms, number of bathrooms, if the home

has a pool, and/or if the home has a garage, and my final variable will be whether or not the city

is located in Los Angeles, CA or other. My first variable population will most likely have a
positive relationship with house price as many people like to move closer to the city and have

homes near everything. I predict my second variable will have a negative relationship with the

home price as many like to avoid areas with a high population of homeless or low-income

groups. My third variable (median income) should have a positive relationship with home price

as areas with higher incomes attract interest into more expensive homes. My fourth variable

(unemployment rate) will have a negative impact on the home price as, like poverty rate, people

property in areas with lower income individuals tend to be lower-priced. My fifth variable (age)

will have a negative impact on the home price as older homes tend to have fewer modern

characteristics and are usually sold without many of the expensive or upgraded features that

newer homes have. My sixth variable (bedrooms) will have a positive impact on the price of the

home as it would presumably be one of the key features people enjoy. My seventh variable

(bathrooms) will have a positive impact on the home price as well. My eighth variable (pool)

will also have a significant positive impact on the home price as it is an additional feature many

homeowners enjoy. The ninth variable (garage) will also have a positive impact on home price.

The tenth variable (Los Angeles, CA or other) will have a negative impact on the home price as

many enjoy having a home in a city, and if the home is not in the city the value should decrease.

Statistical Model/regression Equation

My regression equation follows the general model: Y=B0+B1X1+B2X2

Y=-778,109.26+0.1578 (population) - 5.905 (median income) + 111,919.928 (unemployment) +

7,806.814 + 25,112.006 (poverty) - 341,878.69 (bedrooms) + 916,614.991 (bathrooms) +

1,489,253.23 (pool) + 233,499.602 (garage) + 549,544.046 (LA)

In this statistical equation, the dependent variable (Y) is going to be the house price. I have

labeled my independent variables (X) in the order in which I ran my regression.

Data Source
 I compiled a data set of 100 homes, each selected randomly from Realtor.com. I collected

the physical characteristics of each home including marking whether they had a pool, garage, or

if they were in the city of Los Angeles. I marked them by use of a 1 or 0 measurement. I then

compiled data on each home’s city information like population, unemployment, median income,

and poverty. I wanted to have individual data so that I can have a less general result from my

regression. The data is left in thousands to better reflect any change to accurate numbers for

price. Unemployment and Poverty rates are left in percentage points to help keep changes in

increments of 1.

Empirical Results
 Overall, I was surprised by the results of my regression. The results did not line up to my

expectations from earlier in this paper. My interpretation goes as follows; with an increase of

population by one, the price of a home will go up about 15 cents. With an increase in median

income per dollar, there will be a decrease in the price of a home about $5.90. With a one percent

increase in unemployment, the value of a home will increase $111,919.92. For every year a

house gains in age, there will be an increase in price of $7,086.81. As poverty rates increase by

one percent, the value of a home will decrease $25,112. With each additional room in the home,

the value will decrease $341,878.69. With each additional bathroom, the value of the home will

increase $916,614.99. If the home has a pool, the value will increase $1,489,253.23. If the home

has a garage, the value will increase $233,499.602. If the home is in the city of Los Angeles, the

value will increase $549,544.04. The model as whole is significant as at least one or more of the

variables is considered significant in the variation of the home prices overall. According to the

R-squared in my model, with all variables included, about 45.78% of variation in home price can

be explained with my model. After further testing of each individual variable, only my pool and

bathroom variable are significant, meaning the rest of the variables are less impactful to the

home price, which is contrary to my previous hypothesis. A major discrepancy in my model is

the negative relationship between bedrooms and the home price. This is something that is

completely opposite of what one would assume would happen with a home.
 After checking my data for any skewing or disproportionation, I came across the possible

error into how my model may be accounting for the relationship between bedroom and home

price. There seems to be a vast majority of homes marked as Los Angeles and two or more

homes that skew my data due to extreme home prices. I plan to remove any homes above 2.5

million dollars and adjust for any unnecessary noise within my model in hopes that it will result

in a more certain relationship between key characteristics of a home and its price.
 Conclusively, this model has a lot less noise and retains only what I found to be the best

variables to include. I removed the following variables: unemployment, median income, and age.

I found that since they had uncertain relationships within my last model and were not statistically

significant when performing a hypothesis test at 95% confidence, they would be possible reasons

for the “uncertain” numbers in my last model. I also removed about 10 homes that were skewing

my data for home prices and ran my dummy variable (LA) before population to provide more

control for that variable. The results overall still show that my model is statistically significant,

but my R-square has reduced to 31.55% of variation of price explained. The numbers I am

getting in this model still seem questionable and cause concern for the relationship between my

bedroom and garage variable and the price of a home. My bathroom and poverty variable are the

only statistically significant variables in this model, with bathroom being the only consistent one

across all my testing.

 In all, after running multiple regression and utilizing a variation of different variables to

account for the variation in price, I run into the problem into the problem discussed in,

“Determinants of House Prices: A Quantile Regressions Approach” by Ziets et al (2008), that

housing characteristics are not reflected the same across different distributions of house prices.

After adjusting my model for different variables, I am still left with a negative coefficient for my

bedroom’s variable, which intuitively feels wrong to have. Given this information, I now

hypothesize that the coefficient represents how homes with more bedrooms are often in lower

priced areas in the city. Any future research should seek to run similar regressions but with better

control for the impact of location on price. Possible errors within my data could be that Realtor

and other websites most often put higher priced homes first when conducting searches and

moves older homes or lower priced homes to the back of their search engines, which led to the

skew seen within my data. This research also faced limitation on population as having a larger

set of homes to study this relationship could possibly impact the uncertainty seen in this study.
 References

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https://www.datacommons.org/

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https://www.city-data.com/neighborhood/North-Hollywood-North-Hollywood-CA.html

Realtor.com®: Homes for sale, apartments & Houses for Rent. realtor.com. (n.d.).

Retrieved December 8, 2022, from https://www.realtor.com/

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https://www.city-data.com/

Zietz, J., Zietz, E. N., & Sirmans, G. S. (2008). Determinants of house prices: a quantile

regression approach. The Journal of Real Estate Finance and Economics, 37(4), 317-333.