Using Housing Futures in Mortgage Research

Abstract

Expectations of housing prices play an important role in real estate research. Despite their importance, obtaining a reasonable proxy for such expectations is a challenge. The existing literature on mortgage research either does not include housing expectation proxies in empirical models, or uses "backwardlooking" proxies such as past housing appreciation or time series forecasts based on past housing appreciation.This paper proposes to use the transaction prices of Case-Shiller housing futures as an alternative "forward-looking" proxy. As an example, we compare the performances of four different expectation proxies in explaining mortgage default behavior. The loan level analysis shows that the futures based expectation proxy outperforms other proxies by having the highest regression model fit and being the only proxy that shows a significant negative effect on mortgage default behavior, as theory suggests. Out of sample predictions also show that futures have better prediction accuracy than other proxies. In addition, the paper shows that futures contain additional information that is not present in the backward-looking proxies.

Markov-switching impacts of housing-market expectations on credit markets

“…For instance, Ong et al (2008) argue that optimistic myopic and rational expectations are both likely to negatively influence foreclosure behaviors, and thus affirm that the disposition effect hypothesis is strong when house owners are in minimum equity losses and they are more likely to sell houses when the market is in bad times. Also, Zhu et al (2014) find that higher housing expectations are associated with lower default rates of first lien loans with a 30-year contract term in the ten cities with housing futures transactions, which are used to proxy for housing expectations.…”

Time‐varying impacts of expectations on housing markets across hot and cold phases

“…Following the pioneering studies on asset bubbles by Shiller (2005, 2008), a number of real‐estate literature greatly supports the pivotal role of people's expectations in real‐estate markets. The incomplete list includes Abildgren et al (2018), Burnside et al (2016), Chang et al (2016), Clayton et al (2009), Dieci and Westerhoff (2016), Freybote and Seagraves (2017), Fuster and Zafar (2016), Goetzmann et al (2012), Huang (2013, 2014), Kashiwagi (2014), Lambertini et al (2017), Ling et al (2014), McCarthy and McQuinn (2017), Piazzesi and Schneider (2009), Simsek (2013), Tomura (2013), Zhang (2016), and Zhu et al (2014), among many others. For instance, Burnside et al (2016), Dieci and Westerhoff (2016), Freybote and Seagraves (2017), Kashiwagi (2014), and Piazzesi and Schneider (2009) all put emphasis on the important role of heterogeneous expectations (belief disagreements) in driving housing‐market dynamics.…”