Could we have predicted the recent downturn in home sales of the four US census regions?

Abstract

This paper analyzes the ability of a random walk and, classical and Bayesian versions of autoregressive, vector autoregressive and vector error correction models in forecasting home sales for the four US census regions (Northeast, Middlewest, South, West), using quarterly data over the period of 2001:Q1 to 2004:Q3, based on an in-sample of 1976:Q1 till 2000:Q4. In addition, we also use our models to predict the downturn in the home sales of the four census regions over the period of 2004:Q4 to 2009:Q2, given that the home sales in all the four census regions peaked in 2005:Q3. Based on our analysis, we draw the following conclusions: (i) Barring the South, there always exists a Bayesian model which tends to outperform all other models in forecasting home sales over the out-of-sample horizon; (ii) When we expose our classical and ‘optimal’ Bayesian forecast models to predicting the peaks and declines in home sales, we find that barring the South again, our models did reasonably well in predicting the turning point exactly at 2005:Q3 or with a lead. In general, the fact that different models produce the best forecasting performance for different regions, highlights the fact that economic conditions prevailing at the start of the out-of-sample horizon are not necessarily the same across the regions, and, hence, vindicates our decision to look at regions rather than the economy as a whole. In addition, we also point out that there is no guarantee that the best performing model over the out-of-sample horizon is also well-suited in predicting the downturn in home sales.