Real estate appraisal of land lots using GAMLSS models
Transcript of Real estate appraisal of land lots using GAMLSS models
REAL ESTATE APPRAISAL OF LAND LOTS USING GAMLSS MODELS
LUTEMBERG FLORENCIO, FRANCISCO CRIBARI-NETO, AND RAYDONAL OSPINA
Abstract. The valuation of real estates is of extreme importance for decision mak-ing. Their singular characteristics make valuation through hedonic pricing methodsdifficult since the theory does not specify the correct regression functional form norwhich explanatory variables should be included in the hedonic equation. In this arti-cle we perform real estate appraisal using a class of regression models proposed byRigby & Stasinopoulos (2005): generalized additive models for location, scale andshape (GAMLSS). Our empirical analysis shows that these models seem to be moreappropriate for estimation of the hedonic prices function than the regression modelscurrently used to that end.
1. Introduction
The real estate, apart from being a consumer good that provides comfort and socialstatus, is one of the economic pillars of all modern societies. It has become a formof stock capital, given the expectations of increasing prices, and a means of obtainingfinancial gains through rental revenues and sale profits. As a consequence, the realestate market value has become a parameter of extreme importance.
The estimation of a real estate value is usually done using a hedonic pricing equationaccording to the methodology proposed by Rosen (1974). It is seen as a heterogeneousgood comprised of a set of characteristics and it is then important to estimate an explicitfunction, called hedonic price function, that determines which are the most influentialattributes, or attribute βpackageβ, when it comes to determing its price. However, theestimation of a hedonic equation is not a trivial task since the theory does not determinethe exact functional form nor the relevant conditioning variables.
The use of classical regression methodologies, such as the classical normal linearregression model (CNLRM), for real estate appraisal can lead to biased, inefficientand/or inconsistent estimates given the inherent characteristics of the data (e.g., non-normality, heteroskedasticity and spatial correlation). The use of generalized linearmodels (GLM) is also subject to shortcomings, since the data may come from a dis-tribution outside the exponential family and the functional relationship between theresponse and some conditioning variables may not be the same for all observations.There are semiparametric and nonparametric hedonic price estimations available inthe literature, such as Pace (1993), Anglin & Gencay (1996), Gencay & Yang (1996),
Date: November 4, 2011.Key words and phrases. Cubic splines, GAMLSS regression models, hedonic prices function, non-
parametric smoothing, semiparametric models.Mathematics Subject Classification: Primary 62P25 - Secondary 62P20, 62P05.
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Thorsnes & McMillen (1998), Iwata et al. (2000) and Clapp et al. (2002). We alsohighlight the work of Martins-Filho & Bin (2005), who modeled data from the realestate market in Multnomah County (Oregon-USA) nonparametrically. We note thatthe use of nonparametric estimation strategies require very large datasets in order toavoid the βcurse of dimensionalityβ. Overall, however, most hedonic price estimationsare based on traditional methodologies such as the classical linear regression modeland the class of generalized linear models.
This article proposes a methodology for real estate mass appraisal1 based on theclass of GAMLSS models. The superiority GAMLSS modeling relative to traditionalmethodologies is evidenced by an empirical analysis that employs data on urban landlots located in the city of Aracaju, Brazil. We perform a real estate evaluation in whichthe response variable is the unit price of land lots and the independent variables arereflect the land lots structural, locational and economic characteristics. We estimatethe location and scale effects semiparametrically in such a way that some covariates(the geographical coordinates of the land lot, for instance) enter the predictor non-parametrically and their effects are estimated using smoothing splines2 whereas otherregressors are included in the predictor in the usual parametric fashion. The modeldelivers a fit that is clearly superior to those obtained using the usual approaches. Inparticular, we note that our fit yields a very high pseudo-R2.
The paper unfolds as follows. In Section 2, we briefly present the class of GAMLSSmodels and highlight its main advantages. In Section 3, we describe the data usedin the empirical analysis. In Section 4, we present and discuss the empirical results.Finally, Section 5 closes the paper with some concluding remarks.
2. GAMLSS modeling
2.1. Definition. Rigby & Stasinopoulos (2005) introduced a general class of statisti-cal models called βadditive models for location, scale and shapeβ (GAMLSS). It en-compasses both parametric and semiparametric models, and includes a wide range ofcontinuous and discrete distributions for the response variable. It also allows the sy-multaneous modeling of several parameters that index the response distribution usingparametric and/or nonparametric functions. With GAMLSS models, the distribution ofthe response variable is not restricted to the exponential family and different additiveterms can be included in the regression predictors for the parameters that index the dis-tribution, like smoothing splines and random effects, which yields extra flexibility tothe model. The model is parametric in the sense that the specification of a distributionfor the response variable is required and at the same time it is semiparametric becauseone can model some conditioning effects through nonparametric functions.
The probability density function of the response variable y shall be denoted as f(y|ΞΈ),where ΞΈ = (ΞΈ1, ΞΈ2, . . . , ΞΈp)> is a p-dimensional parameter vector. It is assumed to belongto a wide class of distributions that we denote byD. This class of distributions includescontinuous and discrete distributions as well as truncated, censored and finite mixtures
1Evaluation of a set of real properties through methodology and procedures common to all of them.2For more details on smoothing splines, see Silverman (1984) and Eubank (1999).
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of distributions. In the GAMLSS regression framework the p parameters that indexf (y|ΞΈ) are modeled using additive terms.
Let y = (y1, y2, . . . , yn)> be the vector of independent observations on the responsevariable, each yi having probability density function f (yi|ΞΈ
i), i = 1, . . . , n. Here, ΞΈi =
(ΞΈi1, ΞΈi2, . . . , ΞΈip)> is a vector of p parameters associated to the explanatory variables andto random effects. When the covariates are stochastic, f (yi|ΞΈ
i) is taken to be conditionalon their values. Additionally, for k = 1, 2, . . . , p, gk(Β·) is a strictly monotonic linkfunction that relates the kth parameter ΞΈk to explanatory variables and random effectsthrough an additive predictor:
gk(ΞΈk) = Ξ·k = XkΞ²k +
Jkβj=1
Z jkΞ³ jk, (2.1)
where ΞΈk and Ξ·k are n Γ 1 vectors, Ξ²k = (Ξ²1k, Ξ²2k, . . . , Ξ²Jβ²kk)> is a vector of parametersof length Jβ²k and Xk and Z jk are fixed (covariate) design matrixes of orders n Γ Jβ²k andn Γ q jk, respectively. Finally, Ξ³ jk is a q jk-dimensional random variable. Model (2.1) iscalled GAMLSS (Rigby & Stasinopoulos, 2005).
In many practical situations it suffices to model four parameters (p = 4), usuallylocation (ΞΈ1 = Β΅), scale (ΞΈ2 = Ο), skewness (ΞΈ3 = Ξ½) and kurtosis (ΞΈ4 = Ο); the lattertwo are said to be shape parameters. We thus have the following model:
Location and scaleparameters
g1(Β΅) = Ξ·1 = X1Ξ²1 +
βJ1j=1 Z j1Ξ³ j1,
g2(Ο) = Ξ·2 = X2Ξ²2 +βJ2
j=1 Z j2Ξ³ j2,
Shape parameters
g3(Ξ½) = Ξ·3 = X3Ξ²3 +
βJ3j=1 Z j3Ξ³ j3,
g4(Ο) = Ξ·4 = X4Ξ²4 +βJ4
j=1 Z j4Ξ³ j4.
(2.2)
It is also possible to add to the predictor functions h jk that involve smoothers like cu-bic splines, penalized splines, fractional polynomials, loess curves, terms of variablecoefficients, and others. Any combination of these functions can be included in thesubmodels for Β΅, Ο, Ξ½ and Ο. As Akantziliotou et al. (2002) point out, the GAMLSSframework can be applied to the parameters of any population distribution and gener-alized to allow the modeling of more than four parameters.
GAMLSS models can be estimated using the gamlss package for R (Ihaka &Gentleman, 1996; Cribari-Neto & Zarkos, 1999), which is free software; see http://www.R-project.org. Practitioners can then choose from more than 50 responsedistributions.
2.2. Estimation. Two aspects are central to the GAMLSS additive components fit-ting, namely: the backfitting algorithm and the fact that quadratic penalties in thelikelihood function follow from the assumption that all random effects in the linearpredictor are normally distributed.
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Suppose that the random effects Ξ³ jk in Model (2.1) are independent and normallydistributed with Ξ³ jk βΌ Nq jk(0, Gβ1
jk ), where Gβ1jk is the q jk Γ q jk (generalized) inverse
of the symmetric matrix G jk = G jk(Ξ» jk). Rigby & Stasinopoulos (2005) note that forfixed values of Ξ» jk, one can estimate Ξ²k and Ξ³ jk by maximizing the following penalizedlog-likelihood function:
`p = ` β12
pβk=1
Jkβj=1
Ξ³>jkG jkΞ³ jk, (2.3)
where ` =βn
i=1 log{ f (yi|ΞΈi)} is the log-likelihood function of the data given ΞΈi, for
i = 1, 2, . . . , n. This can be accomplished by using a backfitting algorithm.3
2.3. Model selection and diagnostic. GAMLSS model selection is performed bycomparing various competing models in which different combinations of the com-ponentsM = {D,G,T , Ξ»} are used, whereD specifies the distribution of the responsevariable, G is the set of link functions (g1, . . . , gp) for the parameters (ΞΈ1, . . . , ΞΈp), T de-fines the set of predictor terms (t1, . . . , tp) for the predictors (Ξ·1, . . . , Ξ·p) and Ξ» specifiesthe set of hiperparameters.
In the parametric GAMLSS regression setting, each nested model M can be as-sessed from its fitted global deviance (GD), given by GD = β2`(ΞΈ), where `(ΞΈ) =βn
i=1 `( ΞΈi). Two nested competing GAMLSS models M0 and M1, with fitted global
deviances GD0 and GD1 and error degrees of freedom d fe0 and d fe1, respectively, canbe compared using the generalized likelihood ratio test statistic Ξ = GD0βGD1, whichis asymptotically distributed as Ο2 with d = d f e0 β d f e1 degrees of freedom underM0.For each modelM the number of error degrees of freedom d fe is d fe = n β
βpk=1 d fΞΈk,
where d fΞΈk are the degrees of freedom that are used in the predictor of the model forthe parameter ΞΈk, k = 1, . . . , p.
When comparing non-nested GAMLSS models (including models with smoothingterms), the generalized Akaike information criterion (GAIC; Akaike, 1983) can beused to penalize overfittings. That is achieved by adding to the fitted global deviancesa fixed penalty # for each effective degree of freedom that is used in the model, thatis, GAIC(#) = GD + #d f , where d f denotes the total effective number of degrees offreedom that are used in the model and GD is the fitted global deviance. One thenselects the model with the smallest GAIC(#) value.
To assess the overall adequacy of the fitted model, we propose the randomizedquantile residual (Dunn & Smyth, 1996). It is a randomized version of the Cox &Snell (1968) residual and given by
rqi = Ξ¦β1(ui), i = 1, . . . , n,
where Ξ¦(Β·) denotes the standard normal distribution function, ui is a uniform randomvariable on the interval (ai, bi], with ai = limyβyi F (yi|ΞΈ
i) and bi = F (yi|ΞΈi). A plot
of these residuals against the index of the observations (i) should show no detectable
3For details, see Rigby & Stasinopoulos (2005, 2007), Hastie & Tibshirani (1990) and HΓ€rdle etal. (2004).
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pattern. A detectable trend in the plot of some residual against the predictors may besuggestive of link function misspecification.
Also, normal probability plots with simulated envelopes (Atkinson, 1985) or Wormplots (Buuren & Fredriks, 2001) are a helpful diagnostic tool. The Worm plots werefirst introduced by Buuren & Fredriks (2001) and are useful for analyzing the residualsin different regions (intervals) of the explanatory variable. If no explanatory variableis specified, the worm plot becomes a detrended normal QQ plot of the (normalizedquantile) residuals. When all points lie inside the (dotted) confidence bands (the twoelliptical curves) there is no evidence of model mispecification.
In the context of a fully parametric model GAMLSS we can use pseudo R2 measures.For example, R2β
p = 1 β log L/ log L0 (McFadden, 1974) and R2LR = 1 β (L0/L)2/n (Cox
& Snell, 1989, pp. 208-209), where L0 and L are the maximized likelihood functionsof the null (intercept only) and fitted (unrestricted) models, respectively. The ratio ofthe likelihoods or log-likelihoods may be regarded as a measure of the improvement,over the model with ΞΈi parameters achieved by the model under investigation.
Our proposal, however, is to compare the different models using the pseudo-R2 givenby the square of the sample correlation coefficient between the response and the fittedvalues. Notice that by doing so we can consider both fully parametric models andmodels that include nonparametric components. We can also compare the explanatorypower of a GAMLSS model to those of GLM and CNLRM models. This is the pseudo-R2 we shall use. It was introduced by Ferrari and Cribari-Neto (2004) in the contextof beta regressions and it is a straightfoward generalization of the R2 measure used inlinear regression analysis.
3. Data description
The data contain 2,109 observations on empty urban land lots located in the city ofAracaju, capital of the state of Sergipe (SE), Brazil, and comes from two sources: (i)data collected by the authors from real estate agencies, advertisements on newspapersand research on location (land lots for sale or already sold); (ii) data obtained fromthe βDepartamento de Cadastro ImobiliΓ‘rio da Prefeitura de Aracajuβ. Observationscover the following years: 2005, 2006 and 2007. Each land lot price was recordedonly once during that period. It is also noteworthy that the land lots in the sampleare geographically referenced relative to the South American Datum4 and have theirgeographical positions (latitude, longitude) projected onto the Universal TransverseMercator (UTM) coordinate system.5
The sample used to estimate the hedonic prices equation6 contains, besides the yearof reference, information on the physical (area, front, topography, pavement and block
4The South American Datum (SAD) is the regional geodesic system for South America and refers tothe mathematical representation of the Earth surface at sea level.
5Cilindrical cartographic projection of the terrestrial spheroid in 60 secant cylinders at Earth levelalongside the meridians in multiple zones of 6 degrees longitude and stretching out 80 degrees Southlatitude to 84 degrees North latitude.
6That is, the equation of hedonic prices of urban land lots in Aracaju-SE.
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position), locational (neighborhood, geographical coordinates, utilization coefficientand type of street in which the land lot is located) and economic (nature of the infor-mation that generated the observation, average income of the head of household of thecensitary system where the land is located and the land lot price) characteristics of theland lots. In particular, we shall use the following variables:
β’ YEAR (YR): qualitative ordinal variable that identifies the year in which theinformation was obtained. It assumes the values 2005, 2006 (YR06) and 2007(YR07). It enters the model through dummy variables;β’ AREA (AR): continuous quantitative variable, measured in m2 (square meters),
relative to the projection on a horizontal plane of the land surface;β’ FRONT (FR): continuous quantitative variable, measured in m (meters), concer-
ning the projection of the land lot front over a line which is perpendicular toone of the lot boundaries, when both are oblique in the same sense, or to theβchordβ, in the case of curved fronts;β’ TOPOGRAPHY (TO): nominal qualitative variable that relates to the topograph-
ical conformations of the land lot. It is classified as βplainβ when the landacclivity is smaller than 10% or its declivity is smaller than 5%, and as βroughβotherwise. It is a dummy variable that equals 1 for βplainβ and 0 βroughβ;β’ PAVEMENT (PA): nominal qualitative variable that indicates the presence or ab-
sence of pavement (concrete, asphalt, among others) on the street in which themain land lot front is located. It enters the model as a dummy variable thatequals 1 when the land lot is located on a paved street and 0 otherwise;β’ SITUATION (SI): nominal qualitative variable used to differentiate the disposi-
tion of the land lot on the block. It is classified as βcorner lotβ or βmiddle lotβ.It is a dummy variable that assumes value 1 for corner lots and 0 for all otherland lots;β’ NEIGHBORHOOD (NB): nominal qualitative variable referring to the name of
the neighborhood where the land lot is located. It was categorized as valu-able (highly priced) neighborhoods and other neighborhoods, with the variableshown as VN and regarded as a dummy (1 for valuable neighborhoods). Theneighborhoods were also grouped as belonging or not belonging to the citySouth Zone, dummy denoted by SZ (1 for South Zone);β’ LATITUDE (LAT) and LONGITUDE (LON): continuous quantitative variables cor-
responding to the geographical position of the land lot at the point z = (LAT,LON), where LAT and LON are the coordinates measured in UTM;β’ UTILIZATION COEFFICIENT (UC): discrete variable given by a number that, when
multiplied by the area of the land lot, yields the maximal area (in square me-ters) available for construction. UC is defined in an official urban developmentdocument. It assumes the following values: 3.0, 3.5, . . . , 5.5, 6.0;β’ STREET (STR): ordinal qualitative variable used to differentiate the land lot lo-
cation relative to streets and avenues. It is classified as βminor arterialβ (STR1),
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βcollector streetβ (STR2) and βlocal streetβ according to the importance of thestreet where the land lot is located. It enters the model as dummy variables;β’ NATURE OF THE INFORMATION (NI): nominal qualitative variable that indicates
whether the observation is derived from βofferβ, βtransactionβ or from the Ara-caju register office (real state sale taxes). It enters the model through dummyvariables;β’ SECTOR (ST): discrete quantitative proxy variable of macrolocation used to so-
cioeconomically distinguish the various neighborhoods, represented by the av-erage income of the head of household, in minimum wages, according to theIBGE census (2000). The neighborhood average income functions as a proxyto other characteristics, such as urban amenities. It assumes the following val-ues: 1, 2, . . . , 18;β’ FRONT IN HIGHLY VALUED NEIGHBORHOODS (FRVN): continuous quantitative
variable that assumes strictly positive values and corresponds to the interac-tion between FR and VN variables. It is included in the model to capture theinfluence of land lots front dimensions in βvaluableβ neighborhoods;β’ UNIT PRICE (UP): continuous quantitative variable that assumes strictly positive
values and corresponds to the land lot price divided by its area, measured inR$/m2 (reais per square meter).
In real estate appraisals (and specifically in land lots valuations), the interest typi-cally lies in modeling the unit price as a function of the underlying structural, locationaland economic characteristics of the real estate. We shall then use UP as the dependentvariable (response). The independent variables relate to the locational (NB, VN, SZ,LAT, LON, ST, UC and STR), physical (AR, FR, TO, SI and FRVN) and economic (NI) landlot characteristics; we also account for the year of data collection.
Figure 1 presents box-plots of UP, AR and FR and Table 1 displays summary statisticson those variables. The box-plot of UP shows that its distribution is skewed and thatthere are several extreme observations. Notice from Table 1 that the sample values ofUP range from R$ 2.36/m2 to R$ 800.00/m2 and that 75% of the land lots have unitprices smaller than R$ 82.82/m2.
We note that 263 extreme observations have been identified from the box-plot of AR(see Figure 1). These observations are not in error, they appear as outlying data pointsin the plot because the variable assumes a quite wide range of values: from 41 m2 to91, 780 m2, that is, the largest land lot is nearly two thousand times larger than thesmallest one.
Table 1. Descriptive statistics.
Variable Mean Median Standard error Minimum Maximum RangeUP 72.82 55.56 70.28 2.36 800.00 797.64
LAT 710100.00 710300.00 2722.34 701500.00 714600.00 13100.00LON 8787000.00 8786000.00 6638.77 8769000.00 8798000.00 29000.00
AR 1355.00 300.00 6063.53 48.00 91780.00 91732.00FR 18.13 10.00 30.54 2.60 516.00 513.40
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Figure 1. Box-plots of UP, AR and FR.
In order to investigate how UP relates to some explanatory variables, we produceddispersion plots. Figure 2 contains the following pairwise plots: (i) UP Γ LAT; (ii) UPΓ LON; (iii) log(UP) Γ log(AR); (iv) log(UP) Γ log(FR); (v) UP Γ ST and (vi) UP Γ UC.It shows that there is a direct relationship between UP and the corresponding regressorin (i), (ii), (v) and (vi), whereas in (iii) and (iv) the relationship is inverse. Thus, thereis a tendency for the land lot unit price to increase with latitude, longitude, sectorand also with the utilization coefficient, and to decrease as the area and the front sizeincrease. We note that the inverse relationship between unit price and front size wasnot expected. It motivated the inclusion of the covariate FRVN in our analysis.
It is not clear from Figure 2 whether the usual assumptions of normality and ho-moskedasticity are reasonable. As noted by Rigby & Stasinopoulos (2007), transfor-mations of the response variable and/or of the explanatory variables are usually madein order to minimize deviations from the underlying assumptions. However, this prac-tice may not deliver the expected results. Additionally, the resulting model parametersare not typically easily interpretable in terms of the untransformed variables. A moregeneral modeling strategy is thus called for.
4. Empirical modeling
In what follows we shall estimate the hedonic price function of land lots located inAracaju using the highly flexible class of GAMLSS models. At the outset, however,we shall estimate standard linear regression and generalized linear models. We shalluse these fits as benchmarks for our estimated GAMLSS hedonic price function.
4.1. Data modeling based on the CNLRM. Table 2 lists the classical normal linearregressions that were estimated. The transformation parameter of the Box-Cox modelwas estimated by maximizing the profile log-likelihood function: Ξ» = 0.1010. Allfour models are heteroskedastic and there is strong evidence of nonnormality for thefirst two models. The coefficients of determination range from 0.54 to 0.66. Since
REAL ESTATE APPRAISAL OF LAND LOTS USING GAMLSS MODELS 9
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(iv) log(UP) x log(FR)
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3.0 3.5 4.0 4.5 5.0 5.5 6.0
020
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(vi) UP x UC
UC
UP
Figure 2. Dispersion plots.
the error variances are not constant, we present in Table 3 the estimated parameters ofModel (1.4), which yields the best fit, along with heteroskedasticity-robust HC3 stan-dard errors (Davidson & MacKinnon, 1993). Notice that all covariates are statisticallysignificant at the 5% nominal level, except for LAT (p-value = 0.1263), which suggeststhat pricing differentiation mostly takes place as we move in the North-South direction.
4.2. Hedonic GLM function. Table 4 displays the maximum likelihood fit of thefollowing generalized linear model:
g(UPβ) = Ξ²0 + Ξ²2LON + Ξ²3log(AR) + Ξ²4UC + Ξ²5log(ST) + Ξ²6STR1 + Ξ²7STR2+ Ξ²8SI + Ξ²9PA + Ξ²10TO + Ξ²11NIO + Ξ²12NIT + Ξ²13YR06 + Ξ²14YR07+ Ξ²15SZ + Ξ²16log(FRVN), (Model 2.1)
where UPβ = IE(UP) = Β΅, UP βΌ gamma (Β΅, Ο) and Ξ· = log(Β΅). We have tried a numberof different models, and this one (gamma response and log link) yielded the best fit.We also note that all regressors are statistically significant at the 1% nominal level,except for LAT (p-value = 0.5295), which is why we dropped this covariate from themodel.
4.3. GAMLSS hedonic fit.
4.3.1. Location parameter modeling (Β΅). Since UP (the response) only assumes posi-tive values, we have considered the following distributions for it: log-normal (LOGNO),inverse Gaussian (IG), Weibull (WEI) and gamma (GA). As noted earlier, we usepseudo-R2 given by
pseudo-R2 = [correlation (observed values of UP, predicted values of UP)]2 (4.1)
REAL ESTATE APPRAISAL OF LAND LOTS USING GAMLSS MODELS 10
Table 2. Fitted models via CNLRM.
Model Equation Considerations
1.1 UP = Ξ²0 + Ξ²1LAT + Ξ²2LON + Ξ²3AR + Ξ²4UC +
Ξ²5ST+Ξ²6STR1+Ξ²7STR2+Ξ²8SI+Ξ²9PA+Ξ²10TO+
Ξ²11NIO +Ξ²12NIT +Ξ²13YR06 +Ξ²14YR07 +Ξ²15SZ +
Ξ²16FRVN + Ξ΅
The null hypotheses that the errors are ho-moskedastic and normal are rejected at the 1%nominal level by the Breusch-Pagan and Jarque-Bera tests, respectively. The explanatory vari-ables proved to be statistically significant at the1% nominal level (z-tests). Also, R
2= 0.539,
AIC = 22304 and BIC = 22406.1.2 log(UP) = Ξ²0 +Ξ²1LAT+Ξ²2LON+Ξ²3AR+Ξ²4UC+
Ξ²5ST+Ξ²6STR1+Ξ²7STR2+Ξ²8SI+Ξ²9PA+Ξ²10TO+
Ξ²11NIO +Ξ²12NIT +Ξ²13YR06 +Ξ²14YR07 +Ξ²15SZ +
Ξ²16FRVN + Ξ΅
The null hypotheses that the errors are ho-moskedastic and normal are rejected at the 1%nominal level by the Breusch-Pagan and Jarque-Bera tests, respectively. All explanatory vari-ables proved to be statistically significant at 1%the nominal level (z-tests). Also, R
2= 0.599,
AIC = 2912 and BIC = 3014.1.3 log(UP) = Ξ²0 + Ξ²1LAT + Ξ²2LON + Ξ²3log(AR) +
Ξ²4UC + Ξ²5log(ST) + Ξ²6STR1 + Ξ²7STR2 + Ξ²8SI +
Ξ²9PA + Ξ²10TO + Ξ²11NIO + Ξ²12NIT + Ξ²13YR06 +
Ξ²14YR07 + Ξ²15SZ + Ξ²16log(FRVN) + Ξ΅
The Jarque-Bera test does not reject the null hy-pothesis of normality at the usual nominal levels,but the Breusch-Pagan test rejects the null hypoth-esis of homoskedasticity at the 1% nominal level.All explanatory variables are statistically signifi-cant at the 1% nominal level, except for the LAT
variable (p-value = 0.0190). Also, R2
= 0.651,AIC = 2619 and BIC = 2721.
1.4 UPΞ»β1Ξ»
= Ξ²0 + Ξ²1LAT + Ξ²2LON + Ξ²3log(AR) +
Ξ²4UC + Ξ²5log(ST) + Ξ²6STR1 + Ξ²7STR2 + Ξ²8PA +
Ξ²9TO + Ξ²10NIO + Ξ²11NIT + Ξ²12YR06 + Ξ²13YR07 +
Ξ²14log(FRVN) + Ξ΅
Normality is not rejected by the Jarque-Bera test,but the Breusch-Pagan test rejects the null hypoth-esis of homoskedasticity at the 1% nominal level.All covariates proved to be statistically signifi-cant at the 1% nominal level, except for the LAT
variable (p-value = 0.0881). Also, R2
= 0.657,AIC = 4290 and BIC = 4392.
to measure the overall goodness-of-fit.The models listed in Table 5 include smoothing cubic splines (cs) with 3 effective
degrees of freedom for the covariates LAT, LON, log(AR), UC, ST and log(FRVN). Othersmoothers (such as loess and penalized splines), as well as different combinationsof D (such as BCPE, BCCG, LNO, BCT, exGAUSS, among others; see Rigby andStasinopoulos, 2007) and G (such as identity, inverse, reciprocal, among others), wereconsidered. However they did not yield superior fits. We also note that Model (3.4)yields the smallest values of the three model selection criteria. Table 6 contains the asummary of the model fit.
The use of three effective degrees of freedom in the smoothing functions delivered agood model fit. However, in order to determine whether a different number of effectivedegrees of freedom delivers superior fit, we used two criteria, namely: the AIC (ob-jective) and visual inspection of the smoothed curves (subjective); visual inspectionaimed at avoiding overfitting. We then arrived at Model (3.5). It also uses cubic splinesmoothing (cs), but with a different number of effective degrees of freedom (df) in thesmoothing functions; see Table 7. Notice that there was a considerable reduction β
REAL ESTATE APPRAISAL OF LAND LOTS USING GAMLSS MODELS 11
Table 3. Hedonic price function estimated via CNLRM β Model (1.4).
Estimate Standard error z-statistic p-value(Intercept) β162.6307 34.1920 β4.756 0.0000
LAT 1.85e-05 1.21e-05 1.529 0.1263LON 1.74e-05 4.60e-06 3.798 0.0001
log(AR) β0.3507 0.0192 β18.236 0.0000log(ST) 0.4423 0.0332 13.297 0.0000
UC 0.2651 0.0412 6.429 0.0000STR1 0.4874 0.0717 6.789 0.0000STR2 0.1678 0.0675 2.485 0.0130
SI 0.1119 0.0405 2.757 0.0058PA 0.3853 0.0302 12.767 0.0000TO 0.4905 0.0798 6.145 0.0000
NIO 0.5994 0.0592 10.131 0.0000NIT 0.5111 0.0131 3.886 0.0000
YR06 0.2560 0.0351 7.289 0.0000YR07 0.6450 0.0345 18.645 0.0000
SZ 0.7221 0.0474 15.239 0.0000log(FRVN) 1.2041 0.0137 8.797 0.0000
Table 4. Hedonic price function estimated via GLM β Model (2.1).
Estimate Standard error z-statistic p-value(Intercept) β151.8019 15.7792 β9.620 0.0000
LON 1.77e-05 1.80e-06 9.851 0.0000log(AR) β0.2276 0.0108 β21.120 0.0000
UC 0.1272 0.0231 5.515 0.0000log(ST) 0.2880 0.0193 14.954 0.0000
STR1 0.3562 0.0395 9.021 0.0000STR2 0.1419 0.0408 3.482 0.0005
SI 0.0945 0.0255 3.707 0.0002PA 0.2324 0.0220 10.556 0.0000TO 0.3139 0.0503 6.236 0.0000
NIO 0.4208 0.0348 12.087 0.0000NIT 0.3779 0.0642 5.884 0.0000
YR06 0.1947 0.0242 8.035 0.0000YR07 0.4551 0.0242 18.780 0.0000
SZ 0.4716 0.0310 15.220 0.0000log(FRVN) 0.7467 0.0622 11.997 0.0000
relative to Model (3.4) β in the AIC, BIC and GD values (18822, 19212 and 18684,respectively) and that there is a better agreement between observed and predicted re-sponse values.
Figure 3 contains plots of the smoothed curves from Model (3.5). The dashed linesare confidence bands based on pointwise standard errors. Panels (I), (II), (III), (IV),(V) and (VI) reveal that the effects/impacts of LAT, LON, log(AR), ST, UC and log(FRVN)are typically increasing, increasing/decreasing,7 decreasing, increasing, increasing andincreasing, respectively, with increases in latitude, longitude, log area, socioeconomicindicator, utilization coefficient and log land front in highly priced neighborhoods.Some of these effects were also suggested by the estimated coefficients of the CNLRM
7Panel (II) alternately shows local increasing and decreasing trends.
REAL ESTATE APPRAISAL OF LAND LOTS USING GAMLSS MODELS 12
Table 5. Fitted models via GAMLSS.
Model D G Equation Considerations
3.1 LOGNO logarithmic UP = Ξ²0 + cs(LAT) + cs(LON) +
cs(log(AR)) + cs(UC) + cs(ST) +
Ξ²1STR1 + Ξ²2STR2 + Ξ²3SI + Ξ²4PA +
Ξ²5TO + Ξ²6NIO + Ξ²7NIT + Ξ²8YR06 +
Ξ²9YR07 + Ξ²10SZ + cs(log(FRVN))
All regressors are significant at thelevel 1% significance level (z-tests).Also, AIC = 19155, BIC = 19359and GD = 19083. Pseudo-R2=
0.739.3.2 IG logarithmic UP = Ξ²0 + cs(LAT) + cs(LON) +
cs(log(AR)) + cs(UC) + cs(ST) +
Ξ²1STR1 + Ξ²2STR2 + Ξ²3SI + Ξ²4PA +
Ξ²5TO + Ξ²6NIO + Ξ²7NIT + Ξ²8YR06 +
Ξ²9YR07 + Ξ²10SZ + cs(log(FRVN))
All regressors are significant at the1% significance level (z-test). Also,AIC = 19845, BIC = 20048 andGD = 19773. Pseudo-R2= 0.678.
3.3 WEI logarithmic UP = Ξ²0 + cs(LAT) + cs(LON) +
cs(log(AR)) + cs(UC) + cs(ST) +
Ξ²1STR1 + Ξ²2STR2 + Ξ²3SI + Ξ²4PA +
Ξ²5TO + Ξ²6NIO + Ξ²7NIT + Ξ²8YR06 +
Ξ²9YR07 + Ξ²10SZ + cs(log(FRVN))
All regressors proved to be signifi-cant at the 1% significance level (z-tests). Also, AIC = 19260, BIC =
19463 and GD = 19188. Pseudo-R2= 0.748.
3.4 GA logarithmic UP = Ξ²0 + cs(LAT) + cs(LON) +
cs(log(AR)) + cs(UC) + cs(ST) +
Ξ²1STR1 + Ξ²2STR2 + Ξ²3SI + Ξ²4PA +
Ξ²5TO + Ξ²6NIO + Ξ²7NIT + Ξ²8YR06 +
Ξ²9YR07 + Ξ²10SZ + cs(log(FRVN))
All regressors are significant at the1% significance level (z-tests). Also,AIC = 19062, BIC = 19337 andGD = 19134. Pseudo-R2= 0.746
Table 6. Hedonic price function estimated via GAMLSS β Model (3.4).
Estimative Standard error z-statistic p-value(Intercept) β165.4000 16.1300 β10.251 0.0000
cs(LAT) 5.17e-05 6.22e-06 8.307 0.0000cs(LON) 1.51e-05 2.13e-06 7.071 0.0000
cs(log(AR)) β0.2317 0.0096 β24.074 0.0000cs(ST) 0.0465 0.0037 12.416 0.0000cs(UC) 0.1223 0.0206 5.947 0.0000
STR1 0.3133 0.0349 8.963 0.0000STR2 0.0926 0.0364 2.545 0.0100
SI 0.0920 0.0227 4.054 0.0000PA 0.1891 0.0195 9.670 0.0000TO 0.2662 0.0474 5.951 0.0000
NIO 0.4135 0.0395 13.362 0.0000NIT 0.3485 0.0571 6.102 0.0000
YR06 0.1645 0.0215 7.632 0.0000YR07 0.4358 0.0215 20.235 0.0000
cs(log(FRVN)) 0.6513 0.0569 11.443 0.0000SZ 0.3875 0.0299 12.935 0.0000
and GLM models. Here, however, one obtains a somewhat more flexible global pic-ture, as we shall see.
In panel (I), one notices that as the latitude increases the βcontributionβ of the LATcovariate between the 702000 and 709000 latitudes (approximately) β neighborhoodsthat belong to the expansion zone of the city β is negative, whereas starting from po-sition 709000 (approximately) β South Zone and downtown area β the price effect is
REAL ESTATE APPRAISAL OF LAND LOTS USING GAMLSS MODELS 13
Table 7. Hedonic price function estimated via GAMLSS β Model (3.5).
Estimative Standard error z-statistic p-value(Interceptt) β130.1000 14.8100 β8.787 0.0000
cs(LAT, df=10) 5.92e-05 5.71e-06 10.354 0.0000cs(LON, df=10) 1.05e-05 1.96e-06 5.352 0.0000
cs(log(AR), df=10) β0.2559 8.83e-03 β28.963 0.0000cs(ST, df=8) 0.0373 3.44e-03 10.831 0.0000
cs(UC, df=3) 0.1769 0.0188 9.370 0.0000STR1 0.2571 0.0320 8.012 0.0000STR2 0.0728 0.0334 2.180 0.0293
SI 0.1029 0.0208 4.940 0.0000PA 0.1436 0.0179 7.999 0.0000TO 0.1822 0.0410 4.436 0.0000
NIO 0.4173 0.0284 14.690 0.0000NIT 0.3388 0.0524 6.462 0.0000
YR06 0.1373 0.0198 6.941 0.0000YR07 0.4190 0.0197 21.190 0.0000
cs(log(FRVN), df=10) 0.6599 0.0522 12.630 0.0000SZ 0.5119 0.0275 18.613 0.0000
positive. Additionally, we note that, in certain ranges, increases in latitude lead to dras-tic changes in the slope of the smoothed curve, e.g., between the 708000 and 710000positions, whereas in other areas, for instance between the 706000 and 708000 lat-itudes β the Mosqueiro neighborhood β, an increase in latitude leads to an uniformnegative effect.
Panel (II) shows that as longitude increases to position 8780000 the βcontributionβof the LON covariate is positive and nearly uniform, which almost exclusively coversobservations relative to the Mosqueiro neighborhood. Starting at the 8785000 positionthere is a remarkable change in the slope of the fitted curve, which is triggered by thelocation of the most upper class neighborhoods: from 8785000 to 8794000. After the8794000 position, the effect remains positive, but is decreasing; it eventually becomesnegative.
We see in Panel (III) that as the area (in logs) increases the βcontributionβ of thelog(AR) covariate, for land lots with log areas between 4 and 5 (respectively), is clearlypositive. The effect is negative for land lots with log areas in excess of 5.
In Panel (IV), it is possible to notice that as we move up in the socioeconomicscale the βcontributionβ of the ST covariate, in the range from 1 to 4 minimum wages,is negative, even though the there is an increasing trend. For land lots located inneighborhoods that correspond to more than 4 minimum wages, the effect is alwayspositive; from 10 to 15 minimum wages the effect is uniform.
We note from Panel (V) that, contrary to what one would expect, the βcontributionβof the UC covariate is not positive. In the range from 3.0 to 5.0, the fitted curve displayssmall oscillations, alternating in the postive and negative regions. The positive effectonly holds for utilization coefficients greater than 5.0.
Notice from Panel (VI) that as the front land lot (in logs) increases in highly pricedneighborhoods the βcontributionβ of the log(FRVN) covariate is mostly increasing and
REAL ESTATE APPRAISAL OF LAND LOTS USING GAMLSS MODELS 14
702000 704000 706000 708000 710000 712000 714000
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Figure 3. Smoothed additive terms β Model (3.5).
positive. However, in the 1.5 to 2.0 interval the positive effect is approximately uni-form.
4.4. Comparing models. In order to compare the best estimated models via CNLRM(Model (1.4)), GLM (Model (2.1)) and GAMLSS (Model (3.5)) we shall use the AICand BIC.8 We shall also compare the different models using the pseudo-R2 given in(4.1).
We present in Table 8 a comparative summary of the three models. We note thatModel (3.5) is superior to the two competing models. Not only it has the smallest
8The criteria shall only be used to compare models that use the response (UP) in the same measure-ment scale: Models (2.1) and (3.5).
REAL ESTATE APPRAISAL OF LAND LOTS USING GAMLSS MODELS 15
AIC and BIC values (in comparison to Model (2.1)), but it also has a much largerpesudo-R2. The GAMLSS pseudo-R2 exceeds 0.80, which is notable.
Table 8. Comparative summary of the CNLRM, GLM and GAMLSSestimated models.
Model Class AIC BIC Pseudo-R2
(1.4) (CNLRM) 4290 4392 0.667(2.1) (GLM) 19486 19581 0.672(3.5) (GAMLSS) 18822 19212 0.811
4.5. Dispersion parameter modeling (Ο). After a suitable model for the predictionof Β΅ was selected, we carried out a likelihood ratio test to determine whether theGAMLSS scale parameter Ο is constant for all observations. The null hypothesisthat Ο is constant was rejected at the usual nominal levels. We then built a regres-sion model for such a parameter. To that end, we used stepwise covariate selection,considered different link functions (such as identity, inverse, reciprocal, etc.) and in-cluded smoothing functions (such as cubic splines, loess and penalized splines) in thelinear predictor, just as we had done for the location parameter. We used the AICfor selecting the smoothers and for choosing the number of degrees of freedom of thesmoothing functions together with visual inspection of the smoothed curves.
We present in Table 9 the GAMLSS hedonic price function parameter estimatesobtained by jointly modeling the location (Β΅) and dispersion (Ο) effects; Model (3.6).The model uses the gamma distribution for the response and the log link function forboth Β΅ and Ο. We note that Model (3.6) contains parametric and nonparametric terms,and for that reason it is said to be a linear additive semiparametric GAMLSS.
We note from Table 9 that the parameter estimates of the location submodel in Model(3.6) are similar to the corresponding estimates from Model (3.5), in which Ο wastaken to be constant; see Table 7. It is noteworthy, nonetheless, that there was a sizeablereduction in the AIC, BIC and GD values (18607, 19065 and 18445, respectively) andalso an improvement in the residuals as evidenced by the worm plot; see Figures 4 and5.
Only two covariates were selected for the Ο regression submodel in Model (3.6),namely: ST and log(AR). The former (ST) entered the model in the usual parametricfashion whereas the latter (log(AR)) entered the model nonparametrically through acubic spline smoothing function with ten effective degrees of freedom. We note thatthe positive sign of the log(AR) coefficient indicates that the UP dispersion is larger forland lots with larger areas whereas the negative sign of the ST coefficient indicates thatthe dispersion is inversely related to the socioeconomic neighborhood indicator.
It is noteworthy that the pseudo-R2 of Model (3.6) is quite high (0.817) and that allof explanatory variables are statistically significant at the 1% nominal level which isnot all that common in large sample cross sectional analyses, especially in real estateappraisals. Overall, the variable dispersion GAMLSS model is clearly superior to thealternative models. The good fit of Model (3.6) can be seen in Figure 6 where we plotthe observed response values against the predicted values from the estimated model.
REAL ESTATE APPRAISAL OF LAND LOTS USING GAMLSS MODELS 16
Table 9. Hedonic price function estimated via GAMLSS β Model (3.6).
Β΅ Coefficients
Estimative Standard error z-statistic p-value(Intercept) β95.1300 14.2700 β6.665 0.0000
cs(LAT, df=10) 5.94e-05 5.37e-06 11.053 0.0000cs(LON, df=10) 6.45e-06 1.86e-06 3.460 0.0000
cs(log(AR), df=10) β0.2087 0.0104 β20.138 0.0000cs(ST, df=8) 0.0321 0.0030 10.666 0.0000
cs(UC, df=3) 0.2095 0.0161 13.006 0.0000STR1 0.2039 0.0298 6.838 0.0000STR2 0.0729 0.0276 2.635 0.0084
SI 0.7136 0.0192 3.705 0.0000PA 0.1653 0.0157 10.465 0.0000TO 0.1778 0.0370 4.799 0.0000
NIO 0.3722 0.0251 14.799 0.0000NIT 0.2790 0.0468 5.957 0.0000
YR06 0.1255 0.0175 7.144 0.0000YR07 0.4195 0.0177 23.622 0.00
cs(log(FRVN), df=10) 0.6809 0.0403 16.88 0.0000SZ 0.4824 0.0241 20.001 0.0000
Ο Coefficients
(Intercept) β1.6838 0.0839 β20.072 0.0000cs(log(AR), df=10) 0.1370 0.0143 9.593 0.0000
ST β0.0391 0.0040 β9.632 0.0000
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Figure 4. Worm plot β Model (3.5).
Note that the 45o line in this plot indicates perfect agreement between predicted andobserved values.
REAL ESTATE APPRAISAL OF LAND LOTS USING GAMLSS MODELS 17
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Figure 6. Observed values Γ predicted values of UP β Model (3.6).
Model (3.6) is given by
log(Β΅) = Ξ²0 + cs(LAT, df = 10) + cs(LON, df = 10) + cs(log(AR), df = 10)+cs(UC, df = 3) + cs(ST, df = 8) + Ξ²1STR1 + Ξ²2STR2 + Ξ²3SI+Ξ²4PA + Ξ²5TO + Ξ²6NIO + Ξ²7NIT + Ξ²8YR06 + Ξ²9YR07 + Ξ²10SZ+
cs(log(FRVN), df = 10),log(Ο) = Ξ³0 + Ξ³1ST + cs(log(AR), df = 10),
REAL ESTATE APPRAISAL OF LAND LOTS USING GAMLSS MODELS 18
in which the response (UP) follows a gamma distribution (GA) with location and scaleparameters Β΅ and Ο, respectively. This model proved to be the best model for hedonicprices equation estimation of urban land lots in Aracaju.
5. Concluding remarks
Real state appraisal is usually performed using the standard linear regression modelor the class of generalized linear models. In this paper, we introduced real state ap-praisal based on the class of generalized additive models for location, scale and shape,GAMLSS. Such a class of regression models provides a flexible framework for theestimation of hedonic price functions. It even allows for some conditioning variablesto enter the model in a nonparametric fashion. The model also accomodates variabledispersion and can be based on a wide range of response distributions. Our empiricalanalysis was carried out using a large sample of land lots located in the city of Aracaju(Brazil). The selected GAMLSS model displayed a very high pseudo-R2 (approxi-mately 0.82) and yielded an excellent fit. Moreover, the inclusion of nonparametricadditive terms in the model allowed for the estimation of the hedonic price functionin a very flexible way. We showed that the GAMLSS fit was clearly superior to thosebased on the standard linear regression and on a generalized linear model. We stronglyrecommend the use of GAMLSS models for real state appraisal.
Acknowledgements
LF acknowledges funding from Coordenação de AperfeiΓ§oamento de Pessoal deNΓvel Superior (CAPES), FCN and RO acknowledge funding from Conselho Nacionalde Desenvolvimento CientΓfico (CNPq). We thank three anonymous referees for theircomments and suggestions.
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Banco do Nordeste do Brasil S.A, Boa Vista, Recife/PE, 50060β004, BrazilE-mail address, L. Florencio: [email protected]
Departamento de Estatistica, Universidade Federal de Pernambuco, Cidade Universitaria, Re-cife/PE, 50740β540, Brazil
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Departamento de Estatistica, Universidade Federal de Pernambuco, Cidade Universitaria, Re-cife/PE, 50740β540, Brazil
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