According to a recent report by the government, new home construction fell to an 18-month low in October 2010 (CNNMoney.com, November 17, 2010). Housing starts, or the number of new homes being built, experienced an 11.7% drop in its seasonally adjusted annual rate. Urmil Singh works for a mortgage company in Madison, Wisconsin. She wants to better understand the quantitative relationship between housing starts, the mortgage rate, and the unemployment rate. She gathers seasonally adjusted monthly data on these variables from 2006:01–2010:12. A portion of the data is shown in the accompanying table; the entire data set, labeled Housing_Starts, can be found on the text website.

In a report, use the sample information to:
1. Estimate a multiple regression model for housing starts using the mortgage rate and the unemployment rate as the explanatory variables.
2. At the 5% significance level, evaluate the individual and joint significance of the explanatory variables.
3. Discuss the potential problems of multicollinearity and correlated observations in this time series dataapplication.

Transcribed Image Text:

Date 2006-01 2006-02 Housing Starts (in 1000s) 2273 2119 Mortgage Rate (%) 6.15 6.25 Unemployment Rate (%) 4.7 4.8 520 4.71 9.4 2010-12