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Predicting Downturns in the US Housing Market: A Bayesian Approach

  • Rangan Gupta

    ()

    (Department of Economics, University of Pretoria)

  • Sonali Das

    ()

    (LQM, CSIR, Pretoria)

This paper estimates Bayesian Vector Autoregressive (BVAR) models, both spatial and non-spatial (univariate and multivariate), for the twenty largest states of the US economy, using quarterly data over the period 1976:Q1 to 1994:Q4; and then forecasts one-to-four quarters ahead real house price growth over the out-of-sample horizon of 1995:Q1 to 2006:Q4. The forecasts are then evaluated by comparing them with the ones generated from an unrestricted classical Vector Autoregressive (VAR) model and the corresponding univariate variant the same. Finally, the models that produce the minimum average Root Mean Square Errors (RMSEs), are used to predict the downturns in the real house price growth over the recent period of 2007:Q1 to 2008:Q1. The results show that the BVARs, in whatever form they might be, are the best performing models in 19 of the 20 states. Moreover, these models do a fair job in predicting the downturn in 18 of the 19 states, however, they always under-predict the size of the decline in the real house price growth rate – an indication of the need to incorporate the role of fundamentals in the models.

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Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 200821.

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Length: 21 pages
Date of creation: Jun 2008
Date of revision:
Handle: RePEc:pre:wpaper:200821
Contact details of provider: Postal: PRETORIA, 0002
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Web page: http://www.up.ac.za/economics

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  1. Samuel Zita & Rangan Gupta, 2007. "Modelling and Forecasting the Metical-Rand Exchange Rate," Working Papers 200702, University of Pretoria, Department of Economics.
  2. Guangling ‘Dave’ Liu & Rangan Gupta & Eric Schaling, 2007. "Forecasting the South African Economy: A DSGE-VAR Approach," Working Papers 51, Economic Research Southern Africa.
  3. Rangan Gupta & Sonali Das, 2008. "Spatial Bayesian Methods Of Forecasting House Prices In Six Metropolitan Areas Of South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 76(2), pages 298-313, 06.
  4. Dua, Pami & Miller, Stephen M & Smyth, David J, 1999. "Using Leading Indicators to Forecast U.S. Home Sales in a Bayesian Vector Autoregressive Framework," The Journal of Real Estate Finance and Economics, Springer, vol. 18(2), pages 191-205, March.
  5. Rangan Gupta, 2007. "FORECASTING THE SOUTH AFRICAN ECONOMY WITH GIBBS SAMPLED BVECMs," South African Journal of Economics, Economic Society of South Africa, vol. 75(4), pages 631-643, December.
  6. Rangan Gupta & Alain Kabundi, 2009. "Forecasting Macroeconomic Variables Using Large Datasets: Dynamic Factor Model versus Large-Scale BVARs," Working Papers 143, Economic Research Southern Africa.
  7. 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.
  8. Litterman, Robert B, 1986. "Forecasting with Bayesian Vector Autoregressions-Five Years of Experience," Journal of Business & Economic Statistics, American Statistical Association, vol. 4(1), pages 25-38, January.
  9. Guangling (Dave) Liu & Rangan Gupta, 2006. "A Small-Scale DSGE Model for Forecasting the South African Economy," Working Papers 200621, University of Pretoria, Department of Economics.
  10. Hossain Amirizadeh & Richard M. Todd, 1984. "More growth ahead for Ninth District states," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  11. Anirvan Banerji & Pami Dua & Stephen M. Miller, 2002. "Performance Evaluation of the New Connecticut Leading Employment Index Using Lead Profiles and BVAR Models," Working papers 2002-34, University of Connecticut, Department of Economics, revised Jun 2005.
  12. William C. Gruben & Donald W. Hayes, 1991. "Forecasting the Louisiana economy," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Mar, pages 1-16.
  13. Richard M. Todd, 1984. "Improving economic forecasting with Bayesian vector autoregression," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  14. Guangling (Dave) Liu & Rangan Gupta & Eric Schaling, 2008. "A New-Keynesian DSGE Model for Forecasting the South African Economy," Working Papers 200805, University of Pretoria, Department of Economics.
  15. Rangan Gupta, 2009. "Bayesian Methods Of Forecasting Inventory Investment," South African Journal of Economics, Economic Society of South Africa, vol. 77(1), pages 113-126, 03.
  16. David E. Rapach & Jack K. Strauss, 2007. "Forecasting real housing price growth in the Eighth District states," Regional Economic Development, Federal Reserve Bank of St. Louis, issue Nov, pages 33-42.
  17. Marco Del Negro, 2001. "Turn, turn, turn: Predicting turning points in economic activity," Economic Review, Federal Reserve Bank of Atlanta, issue Q2, pages 1-12.
  18. Rangan Gupta & Alain Kabundi, 2008. "A Dynamic Factor Model for Forecasting Macroeconomic Variables in South Africa," Working Papers 200815, University of Pretoria, Department of Economics.
  19. 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.
  20. Anatoli Kuprianov & William Lupoletti, 1984. "The economic outlook for the Fifth District states in 1984 : forecasts from vector autoregression models," Economic Review, Federal Reserve Bank of Richmond, issue Jan, pages 12-23.
  21. Terrence Kinal & Jonathan Ratner, 1986. "A VAR Forecasting Model of a Regional Economy: Its Construction and Comparative Accuracy," International Regional Science Review, , vol. 10(2), pages 113-126, August.
  22. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, vol. 58(1), pages 113-44, January.
  23. Rangan Gupta, 2006. "FORECASTING THE SOUTH AFRICAN ECONOMY WITH VARs AND VECMs," South African Journal of Economics, Economic Society of South Africa, vol. 74(4), pages 611-628, December.
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