Defining and Analyzing a Business Problem

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FORECASTING THE REAL ESTATE VALUE: METHODOLOGY USING REGRESSION ANALYSIS

1. Introduction

The durability, fixity and heterogeneity of attributes in real estate properties leads to not only costly search to uncover the prices and attributes of property but also high transaction costs in real estate market as compared to financial markets and other commodity markets. The many frictions associated with the purchase of real estate makes it hard to assess the correct value of the warehouse space. However, the prior research has provided enough evidence that there exists a price signal both in time and space to make the forecasting of real estate prices possible.

Assessing the correct value of the real estate is an important problem for everyone concerned with the property exchange be it the buyer, the seller or the broker's. Real estate is a heterogeneous asset wherein the specifications are so diverse that it is not easy to identify the comparables to assess the correct value of the property based on the value of the comparables. Even when such information is available the traditional methods of valuation make use of such information arbitrarily, whereas there are sophisticated statistical processes available, which could make full use of the available information. Although the implementation of statistical methods require some understanding of statistics / mathematics and sufficient amount of right data, it could provide substantially better assessment of the value of the real estate.

Multiple regression analysis can be used to assess the value of a property by developing price as a function of the characteristics of the property. The method provides the process of assessment the attributes of equity and efficiency. By equity we mean that the properties with same characteristics are valued at the same price. By efficiency we mean that the method is able to value the property at its fair market value. Although there are more sophisticated statistical approaches available to predict the value of a property, the multiple regression analysis is straightforward and simple to use. One can perform the regression in MS-Excel and there is no need for any specialized software package to do the analysis.

This paper demonstrates the use of multiple regression analysis to forecast the warehouse prices. The data for the paper is collected from the recently closed real estate deals in the local market. The issue of whether a regression model formulation suffices for such purpose is discussed and the level of predictive accuracy achieved by it to warrant its application in predicting the future deal values.

2. Model Development

To develop the model for estimation of price for warehouse space, we need to look at the possible factors, which may affect the warehouse price. Drawing our knowledge from the microeconomics ...