Forecasting US Commercial Property Price Indexes Using Dynamic Factor Models

36 Pages Posted: 24 Mar 2018

See all articles by Alex Van de Minne

Alex Van de Minne

University of Connecticut - Department of Finance

Marc Francke

University of Amsterdam - Faculty of Economics and Business (FEB); Ortec Finance

David Geltner

Massachusetts Institute of Technology (MIT); MIT Center for Real Estate

Date Written: March 24, 2018

Abstract

The general purpose of a dynamic factor model (DFM) is to summarize a large number of time series into a few common factors. Here we explore a number of DFM specifications applied to 80 granular, non-overlapping indexes of commercial property prices in the US, quarterly from 2001 to 2017. We examine the nature and the structure of the factors and the index forecasts that can be produced using the DFMs. We consider specifications of 1, 2, 3 and 4 common factor trends. As a major motivation for the use of DFMs is their ability to improve out-of-sample forecasting of systems of numerous related series, we apply the DFM estimated factor returns in an Autoregressive Distributed Lag (ARDL) model to forecast the individual real estate price series. We compare the forecasted residuals to a conventional Autoregressive (AR) forecast model as a "benchmark" for two markets: Boston apartments and Dallas commercial. The results show that the ARDL model predicts the crisis and subsequent recovery really well, whereas the "benchmark" model typically follows the previous price trend. We find that the DFM forecasts are most precise with only one or two factors. The two prominent factors may reflect general economic conditions and the rental housing market, respectively.

Keywords: Structural Time Series, EM Algorithm

JEL Classification: R32, C01

Suggested Citation

Van de Minne, Alex and Francke, Marc and Geltner, David, Forecasting US Commercial Property Price Indexes Using Dynamic Factor Models (March 24, 2018). Available at SSRN: https://ssrn.com/abstract=3148680 or http://dx.doi.org/10.2139/ssrn.3148680

Alex Van de Minne (Contact Author)

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

Marc Francke

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Plantage Muidergracht 12
Amsterdam, 1018 TV
Netherlands

HOME PAGE: http://www.uva.nl/en/contact/staff/item/m.k.francke.html?f=francke

Ortec Finance ( email )

Orly Centre
Barajasweg 10
Amsterdam, 1043 CP
Netherlands
+ 31 20 7009 700 (Phone)
+ 31 20 7009 701 (Fax)

HOME PAGE: http://www.ortec-finance.com

David Geltner

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
Cambridge, MA 02139
United States

MIT Center for Real Estate ( email )

77 Massachusetts Avenue
Cambridge, MA 02139
United States

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