How Low Can House Prices Go? Estimating a Conservative Lower Bound

Alexander Bogin, Stephen Bruestle () and William Doerner
Additional contact information
Stephen Bruestle: Penn State Erie

No 15-01, FHFA Staff Working Papers from Federal Housing Finance Agency

Abstract: We develop a theoretically-based statistical technique to identify a conservative lower bound for house prices. Leveraging a model based upon consumer and investor incentives, we are able to explain the depth of housing market downturns at both the national and state level over a variety of market environments. This approach performs well in several historical back tests and has strong out-of-sample predictive ability. When back-tested, our estimation approach does not understate house price declines in any state over the 1987 to 2001 housing cycle and only understates declines in three states during the most recent financial crisis. This latter result is particularly noteworthy given that the post-2001 estimates are performed out-of-sample. Our measure of a conservative lower bound is attractive because it (1) provides a leading indicator of the severity of future downturns and (2) allows trough estimates to dynamically adjust as markets conditions change. This estimation technique could prove particularly helpful in measuring the credit risk associated with portfolios of mortgage assets as part of evaluating static stress tests or designing dynamic stress tests.

Keywords: house prices; trough; lower bound; trend; financial stress testing (search for similar items in EconPapers)
JEL-codes: C58 G21 R31 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2015-05
New Economics Papers: this item is included in nep-ban, nep-ecm, nep-for, nep-rmg and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Journal of Real Estate Finance and Economics, 2017, volume 54, number 1, pages 97-116

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Journal Article: How Low Can House Prices Go? Estimating a Conservative Lower Bound (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:hfa:wpaper:15-01

DOI: 10.1007/s11146-015-9538-8

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