Forecasts and implications of the current housing crisis: switching regimes in a threshold framework

This article aims to explore the implications of the recent housing crisis from a forward-looking perspective in the form of the two-regime switching phenomena under a Threshold Autoregressive (TAR) model. Three categories of thresholds, which are housing prices, housing volumes and price-to-income ratios, are adopted in an attempt to examine the US state-level housing market cycles in multiple dimensions. In general, while lagged differenced thresholds fail to capture the recent housing boom-and-bust regime switching, moving-average thresholds succeed in signalling a housing crisis in many states. The regime-switching autoregressive structures show that housing price cycle has remarkable series dependence, and the housing volume cycle tends to show a mean-reversion pattern. Most importantly, only four states, Arizona, California, Florida and Nevada, display the bust regime of housing price growth during 2006 to 2010. The price-over-income also indicates that less than five states have significant two switching regimes. Otherwise, most states exhibit low-growth regime of housing permits, implying a nationwide housing volume cycle during the current housing crisis. The forecasting system provides a helpful guideline for policy-making of the government as well as household decisions of consumption and investment.