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Machine Learning Predictions of Housing Market Synchronization across US States: The Role of Uncertainty

Rangan Gupta (), Hardik Marfatia (), Christian Pierdzioch and Afees Salisu ()
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Hardik Marfatia: Department of Economics, Northeastern Illinois University, 5500 N St Louis Ave, BBH 344G, Chicago, IL 60625, USA

No 202077, Working Papers from University of Pretoria, Department of Economics

Abstract: We analyze the role of macroeconomic uncertainty in predicting synchronization in housing price movements across all the United States (US) states plus District of Columbia (DC). We first use a Bayesian dynamic factor model to decompose the house price movements into a national, four regional (Northeast, South, Midwest, and West), and state-specific factors. We then study the ability of macroeconomic uncertainty in forecasting the comovements in housing prices, by controlling for a wide-array of predictors, such as factors derived from a large macroeconomic dataset, oil shocks, and financial market-related uncertainties. To accommodate for multiple predictors and nonlinearities, we take a machine learning approach of random forests. Our results provide strong evidence of forecastability of the national house price factor based on the information content of macroeconomic uncertainties over and above the other predictors. This result also carries over, albeit by a varying degree, to the factors associated with the four census regions, and the overall house price growth of the US economy. Moreover, macroeconomic uncertainty is found to have predictive content for (stochastic) volatility of the national factor and aggregate US house price. Our results have important implications for policymakers and investors.

Keywords: Machine learning; Random forests; Bayesian dynamic factor model; Forecasting; Housing markets synchronization; United States (search for similar items in EconPapers)
JEL-codes: C22 C32 E32 Q02 R30 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2020-08
New Economics Papers: this item is included in nep-big, nep-cmp, nep-mac and nep-ure
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