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# MEMO

## To: Kirk McClure

From: Qin He
Date: April 18, 2018
Subject: Residual Analysis for the Model of Relationship between Price Inflation and
he MRB Program

Same as the previous analysis, both semi-log model and linear model verified that
compared with traditional loans, the MRB program does not raise house prices, at the
same time, the predictive quality was not improved by changing the linear model to
semi-log model

Background

The previous analysis proved that, “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.”

This analysis is the way to assess whether any Assumptions of Regression were
violated. using residual analysis to examine if residual satisfies rules below:
1. Residuals are normally distributed.
2. Residuals are distributed with equal variance
3. Residuals are linear in their variance, and
4. No outliers are included among the residuals

## Residual analysis for previous model

According to previous research, the MRB program does not impact the house
price. And the result show in table 1

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Residual Analysis for the Model of Relationship between Price Inflation and he MRB Program

## Table 1: 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

The following steps are using residual analysis to examine the quality of this model.

## Step 1: Examining residuals are normally distributed.

Chart 1 indicates that the residuals of previous model are normally distributed.

## Chart 1: Residual distribution of previous model

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Residual Analysis for the Model of Relationship between Price Inflation and he MRB Program

## Step 2: Examining Residuals are distributed with equal variance.

Equal variance means the residuals have approximately the same vertical
dispersion all along the distribution of the dependent variable. Chart 2 indicates that
variation from mean to zero is biased and not random.

## Step 3: Examining residuals are linear in their variance.

Linear behavior means the residuals are not biased or clustered above or below
the horizontal axis at any one point along the distribution of the dependent variable.
Apparently chart 3 shows the residual are not linear, and we may conclude that this
model cannot predict house value very well. More specific, this model overestimate
low price home’s value and under estimate high price home’s value

## Chart 3: Distribution of Residual by Price

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Residual Analysis for the Model of Relationship between Price Inflation and he MRB Program

## Step 4: Examining no outliers are included among the residuals.

Table 2 indicates that the number of outliers are less the 1 percent among dataset,
so it will not impact the accuracy of this model

## Table 2: Outliers summery

The residual analysis of previous model indicates this model is not strong enough
to be a predictive model to help us predict housing price. And the semi-log model
should be introduced trying to correct bias.

## Table 3: Semi-log model Summery Including MRB Program

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Residual Analysis for the Model of Relationship between Price Inflation and he MRB Program

Note: Using Sequential Selection Method to select variables and add MRB into it
if it isn’t been selected

## Residual Analysis for Semi-log Model

The following steps are using residual analysis to examine the quality of somi-log
model.

## Step 1: Examining residuals are normally distributed.

Chart 4 indicates that the residuals of semi-log model are normally distributed.

## Chart 4: Residual Distribution of Semi-log Model

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Residual Analysis for the Model of Relationship between Price Inflation and he MRB Program

## Step 2: Examining Residuals are distributed with equal variance.

Equal variance means the residuals have approximately the same vertical
dispersion all along the distribution of the dependent variable. Chart 4 indicates that
variation from mean to zero is biased and not random.

## Step 3: Examining residuals are linear in their variance.

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Residual Analysis for the Model of Relationship between Price Inflation and he MRB Program

Linear behavior means the residuals are not biased or clustered above or below
the horizontal axis at any one point along the distribution of the dependent variable.
Apparently chart 5 shows the residual are not linear, and we may conclude that this
model cannot predict house value very well. More specific, this corrected model still
overestimate low price home’s value and under estimate high price home’s value.

## Step 4: Examining no outliers are included among the residuals.

Table 4 indicates that the number of outliers are less the 1 percent among dataset,
so it will not impact the accuracy of this model

## Table 4: Outliers summery

Conclusion:

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Residual Analysis for the Model of Relationship between Price Inflation and he MRB Program

According to the result form linear model and semi-log model, whether
participating the MRB program may not impact the home price. Both models are
strong enough to verify this conclusion.

The problem is even we transferred the linear model to semi-log model, it still
have problem to predict house price: this semi-log model still overestimate low price
home and underestimate high price home. That mean we still need more variables to
if we want to establish a predictive regression model.