A New Index of Housing Sentiment

Abstract

We propose a new measure for housing sentiment and show that it accurately tracks expectations about future house price growth rates. We construct the housing sentiment index using partial least squares on household survey responses to questions about buying conditions for houses. We find that housing sentiment explains a large share of the time-variation in house prices during both boom and bust cycles and it strongly outperforms several macroeconomic variables typically used to forecast house prices.

Keywords: housing sentiment, house price forecastability, partial least squares, dynamic model averaging

JEL Classification: C53, E3, G1