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Business Problem Paper and Presentation Outline 1

Running head: BUSINESS PROBLEM PAPER AND PRESENTATION OUTLINE

Business Problem Paper and Presentation Outline

Team A

Albee Horne, Swasti Ohri, Nila Patel

University of Phoenix
Business Problem Paper and Presentation Outline 2

Business Problem Paper

The paper focuses on the various dependant and independent variables that led the Real Estate

market slump. The paper discusses the basic economic concepts of null and alternative

hypotheses and the theories that support the cause and affect. The methodology used to test the

hypotheses is tested defining how both the primary and secondary data sources were collected

and to prove the affect of these variables on the housing market. Both the demand for the houses

and the ability of the consumer to afford that demand by meeting the loan need affects the

market. The steep demand in the housing market with an inverse relationship of consumer’s

inability to pay off that loan created the current downfall of the housing market.

Since hypothesis is only the estimate of the actual, the results are based on the trend of predicted

data gathered through hypothesis testing. The real estate market is harder to predict based on

trends alone since there are not single dependent or independent variables affecting the market

but the economy as a whole combined with economic policies, rate of growth, income level,

population, employment, taxes etc making forecasting a harder process. Yet the authenticity of

data used in measuring the data can make the forecasting a meaningful and useful analysis.

Primary and Secondary Data

Forecasting the real estate market can be very hard without the use primary and

secondary data since there are so many variables besides the primary demand and supply that

affect the housing market’s prices. There are several secondary factors besides interest on loan

payments and economic conditions that influence the market and the ability of the consumer to

buy and afford the houses in the long run. Primary data is collected through sources that have a

direct and immediate impact on the survival of the market and consist of surveys, interviews and

focus groups, which show a direct relationship between potential customers and the companies.
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Secondary research data is collected based on variables that indirectly affect the market. Both

primary and secondary data are useful for accurate forecasting of the businesses and market

results even though they both differ from each other in various aspects. In most cases, the

secondary data predicts the past trends from previous years and even though it may lack absolute

accuracy since it doesn’t show results based on latest results, the secondary data is obtained from

long term results and may show a trend in the long future. Since the housing market is dependent

upon the economy which doesn’t change overnight but is affected slowly over longtime, the

secondary data used to gather and predict results is extremely useful.

In some cases, secondary data though old may be the only possible source of the desired

data on the subjects, which cannot have primary data at all. Firm in which secondary data are

accumulated and delivered may not accommodate the exact needs and particular requirements of

the current research study. Many a time, alteration or modifications to the exact needs of the

investigator may not be sufficient. To that amount usefulness of secondary data will be lost.

Primary data is completely tailor-made and there is no problem of adjustments. Secondary data is

available effortlessly, rapidly and inexpensively. Primary data takes a lot of time and the unit

cost of such data is relatively high (Adfoster, 2009).

Forecasts based on secondary data are useful in depicting trends in case. Trends allow for

varying assumptions about economic and market related variables to produce a range of possible

forecasts. This is true is sales of new homes. Over time, as the population grows, the number of

new homes sold appears to increase in a predictable and consistent manner with mild

fluctuations. (Lind et al., 2004 p.165).

Correlation Analysis
Business Problem Paper and Presentation Outline 4

Correlation analysis is a strong relationship between independent and dependent

variables. Their meaning and purposes are based on one another. Real estate business and agents

need to research on buying attitude of consumers and many variables to be considered when

selling and or purchasing houses or any property. Real estate agent can be successful in selling

many houses with the knowledge of the relationship between variables. Independent variables

provides the basis of estimation and that is the predictor variable. Dependent variable always

related to independent variables and that is being predicted or estimated. Therefore, increase or

decrease in one variable cause an increase or decrease in the other variables.

Real estate business is rely on many variables that buying attitude of consumers are

depends on it. Correlation analysis on real estate should focus on the current and expected

interest rate, current and expected disposable income and current and expected house prices.

These variables have a predictable permanent impact on buying attitudes.

As real estate cycle depends on the buying attitudes of consumers that is depends on the

employment and income levels of consumers. As employment and income level goes higher,

more consumers are conducive to housing activity and lower income and employment will

decrease the level estate investment. (Smith and Tesarek, 1991; Stenlieb and Hughes, 1977)

Similar to say recession will affect people’s attitudes towards buying houses.

Three independent variables are good time or bad time to buy a house can be divided in three

categories such as percentage responding “good time” by consumers, percentage responding

“bad time” by consumers and percentage responding “uncertain” by consumers.

Real estate can construct an index of a good time to buy a house for consumer as follows.

Buying index = good + uncertain [good / (good+ bad)


Business Problem Paper and Presentation Outline 5

This index measures the percentage of consumer’s response on saying “good time” or “bad time.

Uncertain responses are allocated to good and bad in the same proportion as those saying “good

time” and “bad time.” The independent variable of “good time” to buy house is depends on

some dependent variables such as prices are low, good deals are available in the market, prices

won’t go down, mortgage rate or interest rate is low, borrow in advance, foreclosing rates, good

investment times good prosperity. The independent variable of “bad time” to buy house depends

on high prices of house or property, mortgage or interest rate higher, tight credit, not affordable

to buy and no future or uncertain. Consumers all buying attitudes are strongly depends on above

variables including housing sector variables, current economic, and expected future housing and

general economic condition.

Hypothesis testing:

Hypothesis testing for any business provides a most basic ideas or theories that initially

developed about the economy, investment or market situation. Hypothesis testing decides

whether these basic ideas or theories are true or false. This kind of testing helps people to decide

whether the estimated ideas are true or false and up to what percentage those are good to accept.

As a conclusion of Hypothesis tasting has never made with the 100% confidence. Instead it

always resides between the degree of confidence of 95% or 99%. Still it does not have the

absolute certainty of the result. This process is very much similar to the estimation process.

((DeDusco et al, 2008)

A hypothesis is a statement made about a population parameter research. Hypothesis

testing follows the seven-step process and it has developed based on the scientific method. These

seven steps are: ((DeDusco et al, 2008).

Seven steps of hypothesis testing:


Business Problem Paper and Presentation Outline 6

a. Analyze the null hypothesis and the alternative hypothesis.

b. Determine appropriate test statistic and the probability distribution.

c. Define the required level of significance.

d. Make a decision and evaluate the result.

e. Compute the value of the test statistic based on the sample data.

f. Reject or fail to reject the null hypothesis.

g. Based on rejection or inability to reject the null hypothesis, what is the investment or

economic decision? (DeDusco et al, 2008)

According to the first step, null hypothesis is the statement that will be tested. The null

hypothesis is usually denoted with "H0" and it will be a statement on the value of a population

parameter, usually the mean value if a question relates to return, or the standard deviation if it

relates to risk. (Lind et al, 2004) The real estate plans the hypothesis testing by using null

hypothesis and alternative hypothesis to help the buyer’s attitude of buying house as bellow: Null

hypothesis H0 = Bad time to buy house. (It is not good time to buy house.)

Alternative hypothesis H1= Good time to buy house. Real estate agent should gather enough

dependent variables that support the alternative hypothesis to reject the null hypothesis. The

alternative hypothesis is usually denoted with H1, is good time to buy house. That will be

accepted as a result of the null hypothesis being rejected. In hypothesis testing alternative

hypothesis never been tested directly, but first focus on the null hypothesis. The alternative

hypothesis is the residual of the null. If real estate agent gathers evidence to reject this null

hypothesis and accept the alternative that can prove the time is good to buy the house and

property. If agents fail to reject the null, then it will prove that the time is not good to buy the

house or property. (Lind et al, 2004)


Business Problem Paper and Presentation Outline 7

In second step to test the null hypothesis of bad time to buy house by finding out the

population mean for null hypothesis and alternative hypothesis. It will be two tailed test because

the alternative hypothesis does not state the direction and none of stating that any of that is

greater or lower. Since the population is normally distributed, it will be selected to use the test

statistic that transforming the production data to standard units (Z value) by using the formula for

step five:

Z= (Lind et al, 2004)

Where = sample mean

And n= Number in sample.

In third step compute the critical value of Z for two tailed test by using significance level

and degree of confidence from the Appendix D. (Lind et al, 2004)In forth step real estate makes

a decision and interprets the result by comparing statistic value of Z with the critical value of the

Z. For the sixth and seventh steps based on the rejection decision when the statistic value of the

Z is greater than the critical value of the Z. It will fall in to the rejection region on the two tailed

test graph. That time H0 is reject the null hypothesis and real estate agency will have to accept

the alternative hypothesis to prove the time is good to buy the house. It will consider as a type 1

error, where null hypothesis is false and alternative hypothesis is true. (Lind et al, 2004)
Business Problem Paper and Presentation Outline 8

References:

DeFusco, McLeavey, Pinto, & Runkle, 2008 Quantitative Methods for Investment Analysis, 2nd

edition, Chapter 7 (pages 323-374). Retrieved on 10/28/2008

Referenced from: http://www.investopedia.com/study-guide/cfa-exam/level-1/quantitative-

methods/cfa23

Lind D., Marchal W., & Wathen S. 2004: Statistical techniques in business and economics, 12e;

One sample test of hypothesis (chapter: 10) New York: Mcgraw-hill companies.

Referenced from: https://ecampus.phoenix.edu/content/eBookLibrary2/content/ereader

Smith, B.A., and W.P. Tesarek (1991), “House prices and regional real estate cycles; Market

adjustments in Houston,” Journal of American real Estate and Urban Economics Association,

19e; 396-416.

Referenced from: http://www.business.uconn.edu/realestate/publications/pdf

Stenlieb, G. and J.W. Hughes (1977), “Regional Market Variation: The Northwest versus the

South,” Journal of American Real Estate and Urban Economics Association (spring), 44-68.

Referenced from: http://www.business.uconn.edu/realestate/publications/pdf