QUESTION 1 (30 minutes)

Property taxes are assessed on residential property (homes) based on assessed values. Typically the tax assessor updates these assessments with some delay (every few years). In a market with rapidly declining real estate prices, some homeowners challenge the assessment levels as being too high and not in line with current market conditions. The purpose of these challenges is to lower property taxes. Dr. Dubin conducted the following regression analysis of residential home prices using 80 property sales that occurred in the cities of Snowmass and Basalt Colorado during 2007 and 2008. (Note: these facts are for your background understanding only).

reg dep[soldprc] ind[(1) snowmass sqft yearblt lotacres bedroom bathroom trend]

********* ORDINARY LEAST SQUARES ESTIMATION *********

Dependent Variable:soldprc

IndependentEstimatedStandard t-

Variable CoefficientError Statistic

(1) 7.26160e+0064.87444e+006 1.48973

snowmass5.60186e+0051.59676e+005 3.50826

sqft 2.70312e+00282.46820 3.27777

yearblt -3.34146e+0032.49792e+003 -1.33770

lotacres 1.90288e+0041.75426e+004 1.08472

bedroom-2.32125e+0057.88633e+004 -2.94339

bathroom2.13207e+0058.69567e+004 2.45187

trend -51.061102.72565e+002 -0.18734

Number of Observations80

R-squared0.49587

Corrected R-squared0.44686

Sum of Squared Residuals1.45071e+013

Standard Error of the Regression4.48874e+005

Dubin-Watson Statistic0.93036

Mean of Dependent Variable1.34301e+006

Here soldprc is the sales price ($) for a given residential home transaction, snowmass is a dummy variable for those properties in Snowmass, yearblt is the year the home was built (an earlier yearblt is an older home), lotacres is the acreage of the lot that house sits on, bedroom is the number of bedrooms in the house, bathroom is the number of bathrooms and trend is a time trend. (The notation xe+y is scientific notation).

a.Would you conclude that older homes sell for less based on this regression? (Hint: compare two homes built in the years 1950 and the year 2000 with otherwise identical characteristics).

b.Is it mysterious or expected that the coefficient of bedrooms is negative in this regression?