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

N Kishor

MPRA Paper from University Library of Munich, Germany

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.

Keywords: House Price Forecasting; Fundamentals; Credit Conditions; Supply Indicators; Variable Selection; Direct Forecasts (search for similar items in EconPapers)
JEL-codes: E32 E43 E52 G17 R31 (search for similar items in EconPapers)
Date: 2023-03-23
New Economics Papers: this item is included in nep-des, nep-mac and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:116819

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