Recent years have seen a dramatic drop-off in the ability to survey enough realtors to provide inputs for the value side of the Cost vs. Value reports. Knowing that 2020 posed an even greater challenge to achieve a strong sample of realtors, a statistical modeling approach has been employed as an alternative for the 2021 Cost vs. Value.
Econometric model. The new approach implemented by the CVV team for 2021 widens the geographic coverage and provides greater detail in specific markets. Using the past three years of construction cost estimates, combined with a series of economic variables, an econometric model was fitted to estimates from 2017, 2018 and 2019. This statistical model fit an equation for each project’s costs by using local market housing, income, employment, and economic indicators. Variables used were statistically significant at a 95% confidence level in explaining a high degree of the variation in the three years of costs data. A model predicting project costs was selected based on best overall fit using changes in median household income, changes in number employed, changes in unemployment rates, local GDP, housing starts, existing home sales, existing home values, changes in existing home sales and existing home values, as well as others.
As with the costs estimates, the past three years of value estimates were also modeled at the local market level using many of the same variables as those used in costs models.
This new approach to Cost vs. Value has allowed us to estimate each market by ZIP code. No longer will one set of costs and values need to be used for an entire metro area. If a ZIP code contains much higher-than-average priced homes, the remodeling project costs and values reflect that and provide finer levels of precision.