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.