Using Housing Futures in Mortgage Research
Rent the article at a discountRent now
* Final gross prices may vary according to local VAT.Get Access
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 “backward-looking” 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.
- Ambrose, B. W., Buttimer Jr., R. J., & Capone, C. A. (1997). Pricing mortgage default and foreclosure delay. Journal of Money, Credit and Banking, 29(3), 314–325. CrossRef
- Bajari, P., Chu, C. S., & Park, M. (2008). An empirical model of subprime mortgage default from 2000 to 2007. NBER working paper series.
- Case, K. E., & Shiller, R. J. (1989). The efficiency of the market for single-family homes. The American Economic Review, 1, 125–137.
- Case, K. E., Shiller, R. J., & Weiss, A. N. (1993). Index-based futures and options markets in real estate. Journal of Portfolio Management, 19(2), 83–92. CrossRef
- Cox, D. (1972). Regression models and life-tables. Journal of the Royal Statistical Society. Series B, 34(2), 187–220.
- Demyanyk, Y., & Van Hemert, O. (2011). Understanding the subprime mortgage crisis. Review of Financial Studies, 24(6), 1848–1880. CrossRef
- Foote, C. L., Gerardi, K., & Willen, P. S. (2008). Negative equity and foreclosure: Theory and evidence. Journal of Urban Economics, 64(2), 234–245. CrossRef
- Goetzmann, W. N., Peng, L., & Yen, J. (2009). The subprime crisis and house price appreciation. Working paper, available online at http://ssrn.com/paper=1340577.
- Gürkaynak, R. S., Sack, B. P., & Swanson, E. T. (2007). Market-based measures of monetary policy expectations. Journal of Business and Economic Statistics, 25(2), 201–212. CrossRef
- Hanley, J. A., & McNeil, B. J. (1982). The meaning and use of the area under a receiver operating (ROC) curve characteristic. Radiology, 143, 29–36.
- Kau, J. B., Keenan, D. C., & Kim, T. (1994). Default probabilities for mortgages. Journal of Urban Economics, 35(3), 278–296. CrossRef
- Kau, J. B., & Kim, T. (1994). Waiting to default: The value of delay. Journal of the American Real Estate and Urban Economics Association, 22(3), 539–551. CrossRef
- Krueger, J. T. & Kuttner, K. N. (1996). The fed funds futures rate as a predictor of federal reserve policy. Journal of Futures Markets, 16(8), 865–879. CrossRef
- Leventis, A. (2008). Real estate futures prices as predictors of price trends. FHFA working paper.
- Makridakis, S., Wheelwright, S., & McGee, V. (1983). Forecasting: Methods and applications. New York: John Wiley.
- Shiller, R. J. (2007). Understanding recent trends in house prices and homeownership. In Proceedings of the symposium “Housing, housing finance, and monetary policy” (pp. 89–123). Kansas City: Federal Reserve Bank of Kansas City.
- Zhou, X. H., McClish, D. K., & Obuchowski, N. A. (2002). Statistical methods in diagnostic medicine. New York: John Wiley & Sons. CrossRef
- Using Housing Futures in Mortgage Research
The Journal of Real Estate Finance and Economics
Volume 48, Issue 1 , pp 1-15
- Cover Date
- Print ISSN
- Online ISSN
- Springer US
- Additional Links
- Housing futures
- Real estate futures
- Housing expectation
- House price expectation
- Mortgage default
- Industry Sectors
- Author Affiliations
- 1. Department of Finance, Kansas State University, Manhattan, KS, 66506, USA
- 2. Department of Finance, E.J. Ourso College of Business Administration, Louisiana State University, Baton Rouge, LA, 70803-6308, USA
- 3. Commonwealth Advisors LLC, Baton Rouge, LA, 70801, USA