An appraiser includes both 'total room count' and 'bedroom count' as independent variables in a regression model estimating single-family home sale prices. The variance inflation factor (VIF) for 'bedroom count' is calculated as 12.3. What is the most appropriate appraisal action based on this result?
Correct Answer
B) Remove 'bedroom count' because its VIF exceeds the commonly accepted threshold of 10, indicating problematic multicollinearity.
A VIF > 10 is widely accepted in appraisal practice (per ANSI Z765-2021 commentary and AO-21 guidance) as evidence of severe multicollinearity, which inflates coefficient standard errors and undermines reliability of individual adjustment estimates. While centering (C) may reduce VIF slightly in some cases, it does not resolve structural collinearity between conceptually overlapping variables like total rooms and bedrooms. Retaining both (A) or substituting (D) ignores the statistical instability introduced. USPAP Standards Rule 2-2(a) requires the appraiser to identify and disclose significant limitations — including unreliable regression coefficients due to multicollinearity — that affect credibility of the value opinion.
Why This Is the Correct Answer
A VIF > 10 is widely accepted in appraisal practice (per ANSI Z765-2021 commentary and AO-21 guidance) as evidence of severe multicollinearity, which inflates coefficient standard errors and undermines reliability of individual adjustment estimates. While centering (C) may reduce VIF slightly in some cases, it does not resolve structural collinearity between conceptually overlapping variables like total rooms and bedrooms. Retaining both (A) or substituting (D) ignores the statistical instability introduced. USPAP Standards Rule 2-2(a) requires the appraiser to identify and disclose significant limitations — including unreliable regression coefficients due to multicollinearity — that affect credibility of the value opinion.
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