MEMO

To: Kirk McClure

From: Qin He
Date: April 4, 2018
Subject: Relationship between home price inflation and the MRB program

Compared with traditional loans, the MRB program does not raise house prices.
This means that if the MRB program is properly utilized, the home buyer rather than
home seller will enjoy all the benefits of the program.

Background

Recently the single-family division of the Agency has become concerned over the
publication of research which indicates that home sellers raise the selling price of the
home when the buyer has arranged to finance the purchase by MRB loan. If such a
phenomenon does exist, it means that the home sellers can grab some or all of the
benefits of home buyer by raising the price of the house. The purpose of the study was
to determine whether such a phenomenon existed in the region.

Model Selection

The price of a home can caused by many factors. Home size, decoration, home
age, and so on. Therefore, considering whether MRB program is one of the factors
affecting housing price, it is necessary to consider the effect of other factors on the
housing price.

In order to solve this problem, multiple linear regression model should be used to
analyze the case. The dependent variable is home price, the independent variables are
a set of variables that explain the variation in price holding all other factors constant.

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Relationship between home price and the MRB program

The multiple linear regression model is:

𝑃 = ∑𝑖1(𝑏𝑖 × 𝑥𝑖 ) + 𝑏𝑀𝑅𝐵 × 𝑥𝑀𝑅𝐵
Where:
P: Home price.
𝑥𝑖 : The ith characteristic of the home which influence home
price.
𝑏𝑖 : The coefficient for ith characteristic.
𝑏𝑀𝑅𝐵 : MRB program.
𝑥𝑀𝑅𝐵 : The coefficient for MRB program.

This model will standardize the selling price of homes, if the 𝑏𝑀𝑅𝐵 is positive
and significant, then sellers may be increasing prices. If not, the sellers may not
increase price or the increases are too small to measure by this model.

Independent Variable Selection: Examination of the Correlation Matrix.

The goal of the research is trying to find independent variables that strongly
correlated with home price and significant.

Table 1: Correlation Matrix

Correlations
PRICE MONTH BEDRM BATHS SQFT GARAGE LOTSIZE AC BASEMENTHOMEAGE SCHOOL CENCITY MRB
Pearson Correlation PRICE 1 0.008 0.43 0.569 0.564 0.633 0.24 -0.002 0.309 -0.5 0.388 -0.054 -0.071
MONTH 0.008 1 -0.019 0.114 0.049 0.086 0.069 -0.005 -0.011 0.046 -0.003 0.004 -0.829
BEDRM 0.43 -0.019 1 0.463 0.511 0.188 0.07 -0.012 0.174 -0.19 0.191 0.083 0.024
BATHS 0.569 0.114 0.463 1 0.556 0.351 0.08 -0.113 0.227 -0.214 0.144 0.122 -0.128
SQFT 0.564 0.049 0.511 0.556 1 0.319 0.129 -0.006 0.229 -0.204 0.118 0.028 -0.082
GARAGE 0.633 0.086 0.188 0.351 0.319 1 0.243 0.078 0.163 -0.446 0.353 -0.064 -0.115
LOTSIZE 0.24 0.069 0.07 0.08 0.129 0.243 1 0.256 0.016 -0.138 0.241 -0.128 -0.046
AC -0.002 -0.005 -0.012 -0.113 -0.006 0.078 0.256 1 -0.08 0.074 0.019 -0.037 0.042
BASEMENT 0.309 -0.011 0.174 0.227 0.229 0.163 0.016 -0.08 1 -0.123 -0.1 -0.18 -0.041
HOMEAGE -0.5 0.046 -0.19 -0.214 -0.204 -0.446 -0.138 0.074 -0.123 1 -0.599 0.214 -0.035
SCHOOL 0.388 -0.003 0.191 0.144 0.118 0.353 0.241 0.019 -0.1 -0.599 1 -0.087 0.012
CENCITY -0.054 0.004 0.083 0.122 0.028 -0.064 -0.128 -0.037 -0.18 0.214 -0.087 1 -0.028
MRB -0.071 -0.829 0.024 -0.128 -0.082 -0.115 -0.046 0.042 -0.041 -0.035 0.012 -0.028 1
Sig. (1-tailed) PRICE . 0.447 0 0 0 0 0 0.487 0 0 0 0.18 0.116
MONTH 0.447 . 0.374 0.027 0.204 0.073 0.124 0.463 0.427 0.222 0.482 0.476 0
BEDRM 0 0.374 . 0 0 0.001 0.12 0.42 0.002 0.001 0.001 0.082 0.346
BATHS 0 0.027 0 . 0 0 0.089 0.028 0 0 0.008 0.02 0.015
SQFT 0 0.204 0 0 . 0 0.015 0.457 0 0 0.023 0.318 0.085
GARAGE 0 0.073 0.001 0 0 . 0 0.096 0.003 0 0 0.141 0.026
LOTSIZE 0 0.124 0.12 0.089 0.015 0 . 0 0.393 0.01 0 0.015 0.222
AC 0.487 0.463 0.42 0.028 0.457 0.096 0 . 0.09 0.108 0.378 0.265 0.242
BASEMENT 0 0.427 0.002 0 0 0.003 0.393 0.09 . 0.019 0.047 0.001 0.243
HOMEAGE 0 0.222 0.001 0 0 0 0.01 0.108 0.019 . 0 0 0.278
SCHOOL 0 0.482 0.001 0.008 0.023 0 0 0.378 0.047 0 . 0.071 0.42
CENCITY 0.18 0.476 0.082 0.02 0.318 0.141 0.015 0.265 0.001 0 0.071 . 0.319
MRB 0.116 0 0.346 0.015 0.085 0.026 0.222 0.242 0.243 0.278 0.42 0.319 .

According to correlation Matrix, the five independent variables that strongly

correlated with home price, they are:
Number of bedrooms Number of bathrooms

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Relationship between home price and the MRB program

Square feet in the home Number of garage

Age of the home

It looks a good list of independent variables, though this list of independent does
not consider about the relationship between each independent variable. For example,
number of bedrooms are highly correlated with number of bathrooms, this
phenomenon called multicollinearity. This kind of variable may lead inaccurate
multiple linear regression model.

Independent Variable Selection: Sequential Selection of Regression.

This method can help avoiding the multicollinearity phenomenon. By this

method, the strongest correlated variable will be find out at first, and then it will
analyze other variables which could change R square most and then check the
significance of first one when add the second variable, if the first variable dese not
significant any more, it will be removed. The process will be terminated when there is
no variable can increase R square value significant.

By this Method, the independent variable are:

1. Number of garage spaces
2. Square feet in the home
3. Age of the home
4. Number of bathrooms
5. Presence of a basement
6. Location within inner city school district

This method helps us build a more accurate model compared with first method.

Checking Significance of the Final Model

According to sequential selection method, the MRB program did not include in
the multiple linear regression model, so it is necessary to add it in the model to
identify is the MRB is a factor influence home price.

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Relationship between home price and the MRB program

Table 2: Multiple Linear Regression Model Including MRB Variable

ANOVAa
Model Sum of Squares df Mean Square F Sig.
1 Regression 29671783004 7 4238826143 74.954 .000b
Residual 15665101276 277 56552712.19
Total 45336884280 284
a Dependent Variable: PRICE
b Predictors: (Constant), MRB, SCHOOL, BASEMENT, SQFT, GARAGE, BATHS, HOMEAGE

Coefficientsa
Model Unstandardized Coefficients Standardized Coefficients
t Sig. Correlations Collinearity Statistics
B Std. Error Beta Zero-order Partial Part Tolerance VIF
1 (Constant) 19068.66 2907.852 6.558 0
GARAGE 6459.872 810.022 0.337 7.975 0 0.633 0.432 0.282 0.697 1.434
SQFT 11.482 1.985 0.251 5.785 0 0.564 0.328 0.204 0.663 1.508
HOMEAGE -160.414 48.473 -0.157 -3.309 0.001 -0.5 -0.195 -0.117 0.555 1.801
BATHS 6027.171 1152.178 0.23 5.231 0 0.569 0.3 0.185 0.644 1.553
BASEMENT 4316.982 1182.565 0.138 3.651 0 0.309 0.214 0.129 0.875 1.142
SCHOOL 3404.545 1240.927 0.125 2.744 0.006 0.388 0.163 0.097 0.596 1.677
MRB 414.913 912.019 0.016 0.455 0.65 -0.071 0.027 0.016 0.967 1.034
a Dependent Variable: PRICE

According to the analyze, the MRB program does not affect home price.

Analyzing Predictive Power of the Model

Table 3: Model Summary

Model Summaryb
Model R R Square Adjusted R Square Std. Error of the Estimate Change Statistics
R Square Change F Change df1 df2 Sig. F Change
1 .809a 0.654 0.646 7520.154 0.654 74.954 7 277 0
a Predictors: (Constant), MRB, SCHOOL, BASEMENT, SQFT, GARAGE, BATHS, HOMEAGE
b Dependent Variable: PRICE

According to the value of R Square (~0.65) and Std. Error of the Estimate
(~7500), the model is not strong and accurate enough, it may be caused by lack of
variables such as decoration condition, if more data can be provided from dataset, it
will help strengthen this model.

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Relationship between home price and the MRB program

Conclusion:

This model is strong enough to explain that whether candidate MRB program or
not does not impact the home price. It means compared with traditional loans, the
MRB program does not raise house prices. This means that if the MRB program is
properly utilized, the home buyer rather than home seller will enjoy all the benefits of
the program.