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Using Large Data Sets to Forecast Housing Prices: A Case Study of Twenty US States

  • Rangan Gupta

    (University of Pretoria)

  • Alain Kabundi

    (University of Johannesburg)

  • Stephen M. Miller

    (University of Connecticut and University of Nevada, Las Vegas)

We implement several Bayesian and classical models to forecast housing prices in 20 US states. In addition to standard vector-autoregressive (VAR) and Bayesian vector autoregressive (BVAR) models, we also include the information content of 308 additional quarterly series in some models. Several approaches exist for incorporating information from a large number of series. We consider two approaches -- extracting common factors (principle components) in a Factor-Augmented Vector Autoregressive (FAVAR) or Factor-Augmented Bayesian Vector Autoregressive (FABVAR) models or Bayesian shrinkage in a large-scale Bayesian Vector Autoregressive (LBVAR) models. In addition, we also introduce spatial or causality priors to augment the forecasting models. Using the period of 1976:Q1 to 1994:Q4 as the in-sample period and 1995:Q1 to 2003:Q4 as the out-of-sample horizon, we compare the forecast performance of the alternative models. Based on the average root mean squared error (RMSE) for the one-, two-, three-, and four--quarters-ahead forecasts, we find that one of the factor-augmented models generally outperform the large-scale models in the 20 US states examined in this paper.

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File URL: http://web2.uconn.edu/economics/working/2009-13.pdf
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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2009-13.

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Length: 34 pages
Date of creation: 2009
Date of revision:
Publication status: Published in Journal of Housing Research, 20(2) 2011
Handle: RePEc:uct:uconnp:2009-13
Note: We acknowledge the assistance of D. Liu and D. W. Jansen, who provided the data on the 308 macroeconomic indicators, as well as for clarifying all the data related issues.
Contact details of provider: Postal: University of Connecticut 365 Fairfield Way, Unit 1063 Storrs, CT 06269-1063
Phone: (860) 486-4889
Fax: (860) 486-4463
Web page: http://www.econ.uconn.edu/

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  1. Rangan Gupta & Stephen Miller, 2012. "The Time-Series Properties of House Prices: A Case Study of the Southern California Market," The Journal of Real Estate Finance and Economics, Springer, vol. 44(3), pages 339-361, April.
  2. James H. Stock & Mark W. Watson, 2001. "Forecasting output and inflation: the role of asset prices," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  3. 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.
  4. Stock, James H. & Watson, Mark W., 1999. "Forecasting inflation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 293-335, October.
  5. 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.
  6. Rangan Gupta & Alain Kabundi, 2008. "Forecasting Macroeconomic Variables in a Small Open Economy: A Comparison between Small- and Large-Scale Models," Working Papers 200830, University of Pretoria, Department of Economics.
  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. Tirtiroglu, Dogan, 1992. "Efficiency in housing markets: Temporal and spatial dimensions," Journal of Housing Economics, Elsevier, vol. 2(3), pages 276-292, September.
  9. Mario Forni & Marc Hallin & Marco Lippi & Lucrezia Reichlin, 2003. "The Generalized Dynamic Factor Model. One-Sided Estimation and Forecasting," LEM Papers Series 2003/13, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  10. Matteo Iacoviello & Stefano Neri, 2010. "Housing Market Spillovers: Evidence from an Estimated DSGE Model," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 125-64, April.
  11. Stock J.H. & Watson M.W., 2002. "Forecasting Using Principal Components From a Large Number of Predictors," Journal of the American Statistical Association, American Statistical Association, vol. 97, pages 1167-1179, December.
  12. 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.
  13. James H. Stock & Mark W. Watson, 2005. "Implications of Dynamic Factor Models for VAR Analysis," NBER Working Papers 11467, National Bureau of Economic Research, Inc.
  14. Sonali Das & Rangan Gupta & Alain Kabundi, 2008. "Could We Have Predicted The Recent Downturn In The South African Housing Market?," Working Papers 200831, University of Pretoria, Department of Economics.
  15. Geraint Johnes & Thomas Hyclak, . "House Prices and Regional Labor Markets," Working Papers ec15/93, Department of Economics, University of Lancaster.
  16. 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.
  17. 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.
  18. Ben Bernanke & Jean Boivin & Piotr S. Eliasz, 2005. "Measuring the Effects of Monetary Policy: A Factor-augmented Vector Autoregressive (FAVAR) Approach," The Quarterly Journal of Economics, MIT Press, vol. 120(1), pages 387-422, January.
  19. Richard M. Todd, 1984. "Improving economic forecasting with Bayesian vector autoregression," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  20. Rangan Gupta & Moses M. Sichei, 2006. "A BVAR Model for the South African Economy," Working Papers 200612, University of Pretoria, Department of Economics.
  21. 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.
  22. Rangan Gupta & Stephen M. Miller, 2009. "The Time-Series Properties of Housing Prices: A Case Study of the Southern California Market," Working Papers 200908, University of Pretoria, Department of Economics.
  23. Mark W. Watson & James H. Stock, 2004. "Combination forecasts of output growth in a seven-country data set," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 23(6), pages 405-430.
  24. Topel, Robert H & Rosen, Sherwin, 1988. "Housing Investment in the United States," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 718-40, August.
  25. 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.
  26. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
  27. Rangan Gupta, 2006. "Forecasting the South African Economy with VARs and VECMs," Working Papers 200618, University of Pretoria, Department of Economics.
  28. 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.
  29. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 147-62, April.
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