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The Time-Series Properties of House Prices: A Case Study of the Southern California Market

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  • Rangan Gupta

    ()
    (Department of Economics, University of Pretoria)

  • Stephen M. Miller

    ()
    (Department of Economics, University of Nevada, Las Vegas)

Abstract

We examine the time-series relationship between house prices in eight Southern California metropolitan statistical areas (MSAs). First, we perform cointegration tests of the house price indexes for the MSAs, finding seven cointegrating vectors. Thus, the evidence suggests that one common trend links the house prices in these eight MSAs, a purchasing power parity finding for the house prices in Southern California. Second, we perform temporal Granger causality tests revealing intertwined temporal relationships. The Santa Anna MSA leads the pack in temporally causing house prices in six of the other seven MSAs, excluding only the San Luis Obispo MSA. The Oxnard MSA experienced the largest number of temporal effects from other MSAs, six of the seven, excluding only Los Angeles. The Santa Barbara MSA proved the most isolated in that it temporally caused house prices in only two other MSAs (Los Angeles and Oxnard) and house prices in the Santa Anna MSA temporally caused prices in Santa Barbara. Third, we calculate out-of-sample forecasts in each MSA, using various vector autoregressive (VAR) and vector error-correction (VEC) models, as well as Bayesian, spatial, and causality versions of these models with various priors. Different specifications provide superior forecasts in the different MSAs. Finally, we consider the ability of theses time-series models to provide accurate out-of-sample predictions of the decline in the house prices after their peaks in 2005 and 2006. Recursive forecasts, where the sample is updated each quarter, provide reasonably good forecasts of timing of the peak and decline if the house prices.

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File URL: http://web.unlv.edu/projects/RePEc/pdf/0912.pdf
File Function: First version, 2008
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Bibliographic Info

Paper provided by University of Nevada, Las Vegas , Department of Economics in its series Working Papers with number 0912.

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Length: 62 pages
Date of creation: Mar 2009
Date of revision: Dec 2009
Handle: RePEc:nlv:wpaper:0912

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Keywords: House prices; Cointegration; Temporal causality; Forecasting;

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References

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  1. Pami Dua & Stephen M. Miller & David J. Smyth, 1996. "Using Leading Indicators to Forecast US Home Sales in a Bayesian VAR Framework," Working papers 1996-08, University of Connecticut, Department of Economics.
  2. Thomas Doan & Robert B. Litterman & Christopher A. Sims, 1983. "Forecasting and Conditional Projection Using Realistic Prior Distributions," NBER Working Papers 1202, National Bureau of Economic Research, Inc.
  3. Rangan Gupta & Stephen M. Miller, 2009. ""Ripple Effects" and Forecasting Home Prices in Los Angeles, Las Vegas, and Phoenix," Working papers 2009-05, University of Connecticut, Department of Economics, revised Jun 2009.
  4. Granger, Clive W J, 1986. "Developments in the Study of Cointegrated Economic Variables," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 213-28, August.
  5. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing high house prices: bubbles, fundamentals, and misperceptions," Staff Reports 218, Federal Reserve Bank of New York.
  6. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  7. Rangan Gupta & Moses m. Sichei, 2006. "A Bvar Model For The South African Economy," South African Journal of Economics, Economic Society of South Africa, vol. 74(3), pages 391-409, 09.
  8. MacKinnon, James G & Haug, Alfred A & Michelis, Leo, 1999. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 563-77, Sept.-Oct.
  9. Steven Cook, 2005. "Detecting long-run relationships in regional house prices in the UK," International Review of Applied Economics, Taylor & Francis Journals, vol. 19(1), pages 107-118.
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  11. Stiglitz, Joseph E, 1990. "Symposium on Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 13-18, Spring.
  12. Tirtiroglu, Dogan, 1992. "Efficiency in housing markets: Temporal and spatial dimensions," Journal of Housing Economics, Elsevier, vol. 2(3), pages 276-292, September.
  13. David A. Dickey & Dennis W. Jansen & Daniel L. Thornton, 1991. "A primer on cointegration with an application to money and income," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 58-78.
  14. Clapp, John M. & Tirtiroglu, Dogan, 1994. "Positive feedback trading and diffusion of asset price changes: Evidence from housing transactions," Journal of Economic Behavior & Organization, Elsevier, vol. 24(3), pages 337-355, August.
  15. Rangan Gupta, 2006. "Forecasting the South African Economy with VARs and VECMs," Working Papers 200618, University of Pretoria, Department of Economics.
  16. Mark J. Holmes & Arthur Grimes, 2005. "Is there long-run convergence of regional house prices in the UK?," Working Papers 05_11, Motu Economic and Public Policy Research.
  17. Dua, Pami & Miller, Stephen M, 1996. "Forecasting Connecticut Home Sales in a BVAR Framework Using Coincident and Leading Indexes," The Journal of Real Estate Finance and Economics, Springer, vol. 13(3), pages 219-35, November.
  18. Rapach, David E. & Strauss, Jack K., 2009. "Differences in housing price forecastability across US states," International Journal of Forecasting, Elsevier, vol. 25(2), pages 351-372.
  19. Stuart A. Gabriel & Joe P. Mattey & William L. Wascher, 1999. "House price differentials and dynamics: evidence from the Los Angeles and San Francisco metropolitan areas," Economic Review, Federal Reserve Bank of San Francisco, pages 3-22.
  20. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, October.
  21. Karl E. Case & Robert J. Shiller, 2003. "Is There a Bubble in the Housing Market?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(2), pages 299-362.
  22. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  23. Richard M. Todd, 1984. "Improving economic forecasting with Bayesian vector autoregression," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
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Citations

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Cited by:
  1. Barros, Carlos Pestana & Gil-Alana, Luis A. & Payne, James E., 2012. "Comovements among U.S. state housing prices: Evidence from fractional cointegration," Economic Modelling, Elsevier, vol. 29(3), pages 936-942.
  2. Rangan Gupta & Alan Kabundi & Stephen M. Miller, 2009. "Forecasting the US Real House Price Index: Structural and Non-Structural Models with and without Fundamentals," Working Papers 1001, University of Nevada, Las Vegas , Department of Economics.
  3. Rangan Gupta & Alain Kabundi & Stephen M. Miller, 2009. "Using Large Data Sets to Forecast Housing Prices: A Case Study of Twenty US States," Working Papers 0916, University of Nevada, Las Vegas , Department of Economics.
  4. Giorgio Canarella & Stephen M. Miller & Stephen K. Pollard, 2010. "Unit Roots and Structural Change: An Application to US House-Price Indices," Working Papers 1004, University of Nevada, Las Vegas , Department of Economics.
  5. Francisca G-C Richter & Youngme Seo, 2011. "Inter-regional home price dynamics through the foreclosure crisis," Working Paper 1119, Federal Reserve Bank of Cleveland.
  6. Christophe Andre & Luis A. Gil-Alana & Rangan Gupta, 2013. "Comovement in Euro Area Housing Prices: A Fractional Cointegration Approach," Working Papers 201359, University of Pretoria, Department of Economics.
  7. Nicholas Apergis & Beatrice D. Simo-Kengne & Rangan Gupta, 2013. "Convergence in Provincial-Level South African House Prices: Evidence from the Club Convergence and Clustering Procedure," Working Papers 201322, University of Pretoria, Department of Economics.
  8. Payne, James E., 2012. "The Long-Run Relationship among Regional Housing Prices: An Empirical Analysis of the U.S," Journal of Regional Analysis and Policy, Mid-Continent Regional Science Association, vol. 42(1).
  9. repec:asi:ajoerj:2013:p:785-807 is not listed on IDEAS

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