The objective of this discussion is to prove that heterogeneous variance (heteroscedasticity) in sale prices can drastically reduce the reliability of the computed PRD. Heterogeneous variance can substantially lower the computed PRD if the variance of the sale prices decreases as the sale price increases (falsely indicating progressivity) or substantially raise the PRD if the variance increases as the sale prices increase (falsely indicating regressivity). The PRD can thereby be rendered useless in the face of heteroscedasticity (as when the variances in the sale prices reflect percentage differences rather than uniformly random differences, which is often the case for a wide range of sale prices, such as those for commercial properties or those in a severely escalating residential market).
Mass appraisal techniques, MRA in assessment
This material was first presented on February 10, 2009, at the 13th Annual GIS/CAMA Technologies Conference in North Charleston, South Carolina.
Jensen, D. L. (2009). The effects of heterogeneous variance on the detection of regressivity and progressivity. Journal of Property Tax Assessment & Administration, 6(3), 5-22. Retrieved from https://researchexchange.iaao.org/jptaa/vol6/iss3/1