IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/116819.html
   My bibliography  Save this paper

Forecasting House Prices: The Role of Fundamentals, Credit Conditions, and Supply Indicators

Author

Listed:
  • Kishor, N. Kundan

Abstract

This paper evaluates the ability of various indicators related to macroeconomic fundamentals, credit conditions, and housing supply to predict house price growth in the United States during the post-financial crisis period. We find that the inclusion of different measures of housing supply indicators significantly improves the forecasting performance for the period of 2010-2022. Specifically, incorporating the monthly supply of new homes into a VAR model with house price growth reduces the RMSE by over 30 percent compared to a univariate benchmark. Moreover, forecasting accuracy improves further at a longer forecast horizon (greater than three months) when the mortgage rate spread is also used as a predictor. Further improvements are made if "Direct" forecasts are used instead of iterative forecasts. The shrinkage method like LASSO shows that the monthly supply of new homes is an important predictor at all forecasting horizons, while the mortgage spread is most relevant for longer forecast horizons.

Suggested Citation

  • Kishor, N. Kundan, 2023. "Forecasting House Prices: The Role of Fundamentals, Credit Conditions, and Supply Indicators," MPRA Paper 116819, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:116819
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/116819/1/MPRA_paper_116819.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Dick van Dijk & Timo Terasvirta & Philip Hans Franses, 2002. "Smooth Transition Autoregressive Models — A Survey Of Recent Developments," Econometric Reviews, Taylor & Francis Journals, vol. 21(1), pages 1-47.
    2. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages 119-136, Suppl. De.
    3. James M. Poterba, 1991. "House Price Dynamics: The Role of Tax Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 143-204.
    4. Andrew Caplin & John Leahy, 2011. "Trading Frictions and House Price Dynamics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 283-303, October.
    5. Edward E. Leamer, 2007. "Housing is the business cycle," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 149-233.
    6. Giovanni Favara & Jean Imbs, 2015. "Credit Supply and the Price of Housing," American Economic Review, American Economic Association, vol. 105(3), pages 958-992, March.
    7. Atif Mian & Kamalesh Rao & Amir Sufi, 2013. "Household Balance Sheets, Consumption, and the Economic Slump," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 128(4), pages 1687-1726.
    8. Atif Mian & Amir Sufi, 2011. "House Prices, Home Equity-Based Borrowing, and the US Household Leverage Crisis," American Economic Review, American Economic Association, vol. 101(5), pages 2132-2156, August.
    9. Alejandro Justiniano & Giorgio E. Primiceri & Andrea Tambalotti, 2019. "Credit Supply and the Housing Boom," Journal of Political Economy, University of Chicago Press, vol. 127(3), pages 1317-1350.
    10. N. Kundan Kishor, 2007. "Does Consumption Respond More to Housing Wealth Than to Financial Market Wealth? If So, Why?," The Journal of Real Estate Finance and Economics, Springer, vol. 35(4), pages 427-448, November.
    11. Sonali Das & Rangan Gupta & Alain Kabundi, 2011. "Forecasting regional house price inflation: a comparison between dynamic factor models and vector autoregressive models," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 30(2), pages 288-302, March.
    12. Jonathan McCarthy & Richard Peach, 2004. "Are home prices the next \\"bubble\\"?," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 1-17.
    13. Lunsford, Kurt G., 2015. "Forecasting residential investment in the United States," International Journal of Forecasting, Elsevier, vol. 31(2), pages 276-285.
    14. 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.
    15. Rangan Gupta & Sonali Das, 2010. "Predicting Downturns in the US Housing Market: A Bayesian Approach," The Journal of Real Estate Finance and Economics, Springer, vol. 41(3), pages 294-319, October.
    16. N. Kundan Kishor & Hardik A. Marfatia, 2017. "The Dynamic Relationship Between Housing Prices and the Macroeconomy: Evidence from OECD Countries," The Journal of Real Estate Finance and Economics, Springer, vol. 54(2), pages 237-268, February.
    17. Simon Gilchrist & Egon Zakrajsek, 2012. "Credit Spreads and Business Cycle Fluctuations," American Economic Review, American Economic Association, vol. 102(4), pages 1692-1720, June.
    18. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing High House Prices: Bubbles, Fundamentals and Misperceptions," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 67-92, Fall.
    19. Holly, Sean & Jones, Natasha, 1997. "House prices since the 1940s: Cointegration, demography and asymmetries," Economic Modelling, Elsevier, vol. 14(4), pages 549-565, October.
    20. Glaeser, Edward L. & Gyourko, Joseph & Saiz, Albert, 2008. "Housing supply and housing bubbles," Journal of Urban Economics, Elsevier, vol. 64(2), pages 198-217, September.
    21. Gilchrist, Simon & Yankov, Vladimir & Zakrajsek, Egon, 2009. "Credit market shocks and economic fluctuations: Evidence from corporate bond and stock markets," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 471-493, May.
    22. Meen, Geoffrey, 2002. "The Time-Series Behavior of House Prices: A Transatlantic Divide?," Journal of Housing Economics, Elsevier, vol. 11(1), pages 1-23, March.
    23. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    24. Coulson, N Edward, 1999. "Housing Inventory and Completion," The Journal of Real Estate Finance and Economics, Springer, vol. 18(1), pages 89-105, January.
    25. Smith, Lawrence B & Rosen, Kenneth T & Fallis, George, 1988. "Recent Developments in Economic Models of Housing Markets," Journal of Economic Literature, American Economic Association, vol. 26(1), pages 29-64, March.
    26. N. Kundan Kishor & Hardik A. Marfatia, 2018. "Forecasting house prices in OECD economies," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 37(2), pages 170-190, March.
    27. N. Kundan Kishor & Evan F. Koenig, 2014. "Credit Indicators as Predictors of Economic Activity: A Real‐Time VAR Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(2-3), pages 545-564, March.
    28. Bhatt, Vipul & Kishor, N. Kundan, 2022. "Role of credit and expectations in house price dynamics," Finance Research Letters, Elsevier, vol. 50(C).
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kishor, N. Kundan & Marfatia, Hardik A. & Nam, Gooan & Rizi, Majid Haghani, 2022. "The local employment effect of house prices: Evidence from U.S. States," Journal of Housing Economics, Elsevier, vol. 55(C).
    2. Engerstam, Sviatlana, 2020. "Macroeconomic determinants of apartment prices in Swedish and German cities," Working Paper Series 20/2, Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance.
    3. Narayan Kundan Kishor, 2021. "Forecasting real‐time economic activity using house prices and credit conditions," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 40(2), pages 213-227, March.
    4. Piazzesi, M. & Schneider, M., 2016. "Housing and Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1547-1640, Elsevier.
    5. Sun, Xiaojin & Tsang, Kwok Ping, 2019. "Large price movements in housing markets," Journal of Economic Behavior & Organization, Elsevier, vol. 163(C), pages 1-23.
    6. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    7. N. Kundan Kishor & Hardik A. Marfatia, 2017. "The Dynamic Relationship Between Housing Prices and the Macroeconomy: Evidence from OECD Countries," The Journal of Real Estate Finance and Economics, Springer, vol. 54(2), pages 237-268, February.
    8. Guerrieri, V. & Uhlig, H., 2016. "Housing and Credit Markets," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1427-1496, Elsevier.
    9. Yongqiang Chu, 2014. "Credit constraints, inelastic supply, and the housing boom," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(1), pages 52-69, January.
    10. Chao He & Randall Wright & Yu Zhu, 2015. "Housing and Liquidity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 435-455, July.
    11. Rizi, Majid Haghani, 2021. "What moves housing markets: A state-space approach of the price-income ratio," International Economics, Elsevier, vol. 167(C), pages 96-107.
    12. Graeme O'Meara, 2015. "Housing Bubbles and Monetary Policy: A Reassessment," The Economic and Social Review, Economic and Social Studies, vol. 46(4), pages 521-565.
    13. Maynou, Laia & Monfort, Mercedes & Morley, Bruce & Ordóñez, Javier, 2021. "Club convergence in European housing prices: The role of macroeconomic and housing market fundamentals," Economic Modelling, Elsevier, vol. 103(C).
    14. Rüth, Sebastian & Bachmann, Rüdiger, 2016. "Systematic Monetary Policy and the Macroeconomic Effects of Shifts in Loan-to-Value Ratios," VfS Annual Conference 2016 (Augsburg): Demographic Change 145826, Verein für Socialpolitik / German Economic Association.
    15. Huang, MeiChi & Chiang, Hsiu-Hsuan, 2017. "An early alarm system for housing bubbles," The Quarterly Review of Economics and Finance, Elsevier, vol. 63(C), pages 34-49.
    16. Zheng Song & Giovanni Favara, 2009. "House Price Dynamics with Heterogeneous Expectations," 2009 Meeting Papers 775, Society for Economic Dynamics.
    17. Clark, Steven P. & Coggin, T. Daniel, 2011. "Was there a U.S. house price bubble? An econometric analysis using national and regional panel data," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(2), pages 189-200, May.
    18. Hiller, Norbert & Lerbs, Oliver W., 2016. "Aging and urban house prices," Regional Science and Urban Economics, Elsevier, vol. 60(C), pages 276-291.
    19. Michael Berlemann & Julia Freese & Sven Knoth, 2012. "Eyes Wide Shut? The U.S. House Market Bubble through the Lense of Statistical Process Control," CESifo Working Paper Series 3962, CESifo.
    20. MeiChi Huang, 2017. "Vulnerabilities to housing bubbles: Evidence from linkages between housing prices and income fundamentals," International Finance, Wiley Blackwell, vol. 20(1), pages 64-91, March.

    More about this item

    Keywords

    House Price Forecasting; Fundamentals; Credit Conditions; Supply Indicators; Variable Selection; Direct Forecasts;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:116819. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.