On the Predictive Content of Leading Indicators: The Case of U.S. Real Estate Markets

45 Pages Posted: 15 Mar 2013 Last revised: 6 Sep 2013

See all articles by Sotiris Tsolacos

Sotiris Tsolacos

University of Reading - Centre for Spatial and Real Estate Economics (CSpREE)

Chris Brooks

University of Reading - ICMA Centre

Ogonna Nneji

University of Reading - ICMA Centre

Date Written: September 2013

Abstract

This paper employs a probit model and a Markov switching model using information from the Conference Board Leading Indicator series to detect the turning points in four key US commercial rents series. We find that both the approaches based on the leading indicator have considerable power to predict changes in the direction of commercial rents up to two years ahead, exhibiting strong improvements over a naïve model, especially for the warehouse and apartment sectors. The empirical support for the adequacy of these prediction methodologies, from both in-sample and real time forecasting assessments, makes them a valuable tool to real estate professionals forecasting the US real estate markets. We find that while the Markov switching model nominally appears to be more successful in predicting periods of negative growth, it lags behind actual turnarounds in market outcomes whereas the probit is able to detect turning points several quarters ahead.

Keywords: Leading indicator, US rents, turning point forecasting, direction prediction

JEL Classification: C53, C34, R39

Suggested Citation

Tsolacos, Sotiris and Brooks, Chris and Nneji, Ogonna, On the Predictive Content of Leading Indicators: The Case of U.S. Real Estate Markets (September 2013). Available at SSRN: https://ssrn.com/abstract=2233085 or http://dx.doi.org/10.2139/ssrn.2233085

Sotiris Tsolacos

University of Reading - Centre for Spatial and Real Estate Economics (CSpREE) ( email )

Department of Economics Whiteknights P.O. Box 219
Reading, RG6 6AH
United Kingdom
44-0118-931-823 (Phone)
44-118-931-6533 (Fax)

Chris Brooks (Contact Author)

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom
+44 118 931 82 39 (Phone)
+44 118 931 47 41 (Fax)

Ogonna Nneji

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

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