A New Dynamic House-Price Index

36 Pages Posted: 8 Jan 2020

See all articles by Richard Stanton

Richard Stanton

University of California, Berkeley - Haas School of Business

Chris Strickland

AutoStat Institute: The Centre for Complex Analytics and Visualisation

Nancy Wallace

University of California, Berkeley - Real Estate Group

Date Written: November 15, 2019

Abstract

Using a newly available panel data set containing property-specific, time-varying hedonic characteristics and sales prices, we develop a new dynamic house-price model that is suitable for out-of-sample forecasting applications such as mortgage valuation and bank stress-testing. The model is set up in a classical state-space framework and includes common factors that are univariate structural time series models scaled to form linear combinations specific to locations. Our common factors include trend, seasonal, and autoregressive components. The equations are linear and errors are Gaussian; however, the unbalanced nature of our panel data means that standard Kalman-filter smoothing algorithms are not suitable. Instead, we apply an alternative three-block Markov Chain Monte Carlo algorithm Strickland, Turner, Denham, and Mengersen (2009). We find significant in- and out-of-sample forecasting differences between our model and standard repeat-sales and hedonic regressions. We also test, and reject, two assumptions of repeat-sales estimators: a single common trend for all regions and a unit root in the index.

Keywords: House-Price Index, Markov Chain Monte Carlo, Stress Testing, Hedonic Index

JEL Classification: G21

Suggested Citation

Stanton, Richard H. and Strickland, Chris and Wallace, Nancy E., A New Dynamic House-Price Index (November 15, 2019). Available at SSRN: https://ssrn.com/abstract=3505588 or http://dx.doi.org/10.2139/ssrn.3505588

Richard H. Stanton (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

Haas School of Business
545 Student Services Building #1900
Berkeley, CA 94720-1900
United States
(510) 642-7382 (Phone)
(510) 643-1412 (Fax)

Chris Strickland

AutoStat Institute: The Centre for Complex Analytics and Visualisation ( email )

Nancy E. Wallace

University of California, Berkeley - Real Estate Group ( email )

Berkeley, CA 94720-1900
United States

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