Forecasting the US Real House Price Index: Structural and Non-Structural Models with and without Fundamentals

Rangan Gupta, Alain Kabundi () and Stephen Miller

No 2009-42, Working papers from University of Connecticut, Department of Economics

Abstract: We employ a 10-variable dynamic structural general equilibrium model to forecast the US real house price index as well as its turning point in 2006:Q2. We also examine various Bayesian and classical time-series models in our forecasting exercise to compare to the dynamic stochastic general equilibrium model, estimated using Bayesian methods. In addition to standard vector-autoregressive and Bayesian vector autoregressive models, we also include the information content of either 10 or 120 quarterly series in some models to capture the influence of fundamentals. We consider two approaches for including information from large data sets -- extracting common factors (principle components) in a Factor-Augmented Vector Autoregressive or Factor-Augmented Bayesian Vector Autoregressive models or Bayesian shrinkage in a large-scale Bayesian Vector Autoregressive models. We compare the out-of-sample forecast performance of the alternative models, using the average root mean squared error for the forecasts. We find that the small-scale Bayesian-shrinkage model (10 variables) outperforms the other models, including the large-scale Bayesian-shrinkage model (120 variables). Finally, we use each model to forecast the turning point in 2006:Q2, using the estimated model through 2005:Q2. Only the dynamic stochastic general equilibrium model actually forecasts a turning point with any accuracy, suggesting that attention to developing forward-looking microfounded dynamic stochastic general equilibrium models of the housing market, over and above fundamentals, proves crucial in forecasting turning points.

Keywords: US House prices; Forecasting; DSGE models; Factor Augmented Models; Large-Scale BVAR models (search for similar items in EconPapers)
JEL-codes: C32 R31 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2009-12
New Economics Papers: this item is included in nep-cba, nep-for, nep-ore and nep-ure
Note: We gratefully acknowledge Matteo Iacoviello and Stefano Neri for many helpful comments. All remaining errors are ours.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Published in Economic Modelling, July 2011

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Related works:
Journal Article: Forecasting the US real house price index: Structural and non-structural models with and without fundamentals (2011)
Working Paper: Forecasting the US Real House Price Index: Structural and Non-Structural Models with and without Fundamentals (2010)
Working Paper: Forecasting the US Real House Price Index: Structural and Non-Structural Models with and without Fundamentals (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:uct:uconnp:2009-42

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