DIY House Price Forecasting

Predicting markets is something that investors have been trying to do for centuries, with limited success. What if you had the key to real estate forecasting? There are a few models which may hold the secret.

The housing crisis in the US is largely the cause of the global economic slump, and many believe when it comes back, both in the US and globally, we will see a return to growth and prosperity. So it is fitting that we examine how to forecast home prices.

Harvard professor Edward Glaeser puts forth a few compelling models. The first one is similar to a "technical analysis" used for stocks. It maintains that a few statistical norms of the housing market will continue on into the future: Long-term reversion to the mean and short-term momentum.

This first model starts with long-term mean reversion, which assumes that after big booms come big busts. Glaeser has found that for every dollar in an area's property appreciation that same area's prices will slide by 32 cents over the following five years.

Then it evaluates shorter terms like a year or a month. In these periods, momentum prevails. For every buck in price rise per year, they will appreciate another 71 cents the next year. Glaeser attributes this in part to people's future price assumptions being based on recent past appreciations.

When taken together, these long-term and short-term patterns create cycles. Momentum is generated at the beginning of a property rise. But this appreciation tapers off when the long-term revision takes over. Momentum still prevails, but now it is in a downward fashion.

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