Thursday, December 18, 2014

Comparing requested and estimated rents

Comparing requested and estimated rents

Question:   The table below has data on requested and estimated rents on home in Venice California.


Requested and Estimated Rents for 3+ bed room houses in Venice California
Requested Rent
Zillow
Rent
estimate
Difference Rent - Estimate
% Difference
1
3798
4000
-202
-5.3%
2
4550
5100
-550
-12.1%
3
4600
4700
-100
-2.2%
4
4895
4600
295
6.0%
5
5395
5300
95
1.8%
6
5900
4600
1300
22.0%
7
6500
5100
1400
21.5%
8
6800
5000
1800
26.5%
9
6500
6500
0
0.0%
10
6500
7100
-600
-9.2%
11
6995
7900
-905
-12.9%
12
7750
6000
1750
22.6%
13
7950
6900
1050
13.2%
14
7950
4600
3350
42.1%
15
8000
4800
3200
40.0%
16
8000
5200
2800
35.0%
17
8500
6400
2100
24.7%
18
8500
8500
0
0.0%
19
11500
6900
4600
40.0%
20
12500
12000
500
4.0%
21
12500
6600
5900
47.2%
22
15000
7600
7400
49.3%


Source of data is





Observed on 12/18/14.


Based on this data compare requested rents to Zillow estimated rents.

Is the difference between requested and estimated rents statistically significant?

What does this result suggest about the use of Zillow rent estimates on real estate decisions?

Statistical Analysis:  Requested rents on 3-bed room houses are substantially larger than Zillow rent estimates in this sample.



Descriptive Statistics on Requested and Estimated Rents in Venice CA
Requested Rent
Zillow
Rent
Estimate
Difference Rent - Estimate
% Difference
Mean
$7,754
$6,155
$1,599
16.1%
Median
$7,373
$5,650
$1,175
17.4%
Standard Deviation
$2,863
$1,803
$2,194
20.2%
Skew
$1
$2
$1
17.5%
Min
$3,798
$4,000
-$905
-12.9%
Q1
$5,774
$4,775
-$25
-0.5%
Q3
$8,500
$6,950
$2,900
36.3%
Max
$15,000
$12,000
$7,400
49.3%

3-bed Room + Homes Venice Ca December 18 2104

The average percentage difference between the requested rent and the Zillow rent estimate is 16.1 percentage points.

The median difference is 17.4 percentage points

The range is from -12.9 percent to 49.3 percent.


The difference in mean requested and Zillow rent estimates is statistically significant.   Below are the results of the paired t-test on the difference in the mean difference and the mean percentage difference.


Hypothesis Test Results for Difference in Requested and Estimated Rents
Z score
Paired Difference for Differences in $
16.0
Paired Percentage Differences
17.5


A post that uses the Wilcoxon test to compare medians will be available shortly.


Ramifications for real estate decisions:

A person who places Zillow rent estimates into a rent/buy decision model may choose to rent.   However, this person may change his or her mind once shopping occurs if homeowners don’t reduce their requested rent.

The rent a house goes for is a major determinant of the house’s value.  A realtor who uses the Zillow rent estimate to figure out what a house is worth will undervalue the house.

The likely rent is often the primary factor impacting whether a owner will list and sell a house or rent it out.   Realtors who rely on Zillow rent estimates are understating potential rental income.    This may persuade some people to list and sell rather than rent out.

A future post will examine the potential impact of erroneous rent information on financial calculations in more detail.






No comments:

Post a Comment