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The Correct use of Confidence Intervals and Regression Analysis in Determining the Value of Residential Homes

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  • Donald R. Epley
  • William Burns

Abstract

This paper shows that (1) the principle of substitution has been misinterpreted in regression analysis on residential homes by the misuse of the confidence interval; (2) the proper confidence interval to judge the accuracy of the equation is the mean CI; and (3) the accuracy of the equation can be improved by applying factor analysis to the entire data set rather than a predetermined neighborhood. These results are illustrated in a sample of 571 residential sales in Northwest Arkansas during 1975. The data are divided into clusters, and a regression equation is computed for each. The results show that the mean confidence interval is the correct application of the principle of substitution. The correct decision rule to determine the superiority of the multi‐equation or the single equation model compares the explained to the unexplained variation. These results should allow the appraiser to select properties that are better suited for comparison. This will improve the accuracy of the regression analysis and resulting estimates of property value.

Suggested Citation

  • Donald R. Epley & William Burns, 1978. "The Correct use of Confidence Intervals and Regression Analysis in Determining the Value of Residential Homes," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 6(1), pages 70-85, March.
    • Handle: RePEc:bla:reesec:v:6:y:1978:i:1:p:70-85
    DOI: 10.1111/1540-6229.00169
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    Cited by:

    1. Antonio Nesticò & Marianna La Marca, 2020. "Urban Real Estate Values and Ecosystem Disservices: An Estimate Model Based on Regression Analysis," Sustainability, MDPI, vol. 12(16), pages 1-15, August.

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