Determents of Housing Determents of Housing PricesPrices

What & WHYWhat & WHY

Our goal was to discover the determents of rising home prices and to identify any anomies in historic housing prices.

To figure out if current housing market is over priced – if there is a real estate bubble.

HypothesisHypothesis

Population and wealth increases drive up home prices

HOWHOW

1) We collected average home prices in the US: on a monthly basis (1975-2002).

2) Then we gathered data we thought would be good determents of home prices

3) Set up a model and ran a regression

4) Modified our model

5) Interpreted the results

Exploratory Data Exploratory Data AnalysisAnalysis

Variables:

Mortgage rates, unemployment rates,CPI, PPI, S&P Index (alterative INV),

and income per capita.

Sources:

Economagic and the St. Louis Fed.

STAT AnalysisSTAT Analysis

mean home prices vs income per mean home prices vs income per

capitacapita

-20000

-10000

0

10000

20000

30000

0

50000

100000

150000

200000

250000

76 78 80 82 84 86 88 90 92 94 96 98 00 02

Residual Actual Fitted

Dependent Variable: AVGHOMESALES

Method: Least Squares

Date: 11/20/02 Time: 18:16

Sample: 1975:01 2002:07

Included observations: 331

Variable Coefficient Std. Error t-Statistic Prob.

INCPERCAP 7.069048 0.021993 321.4248 0.0000

R-squared 0.976423 Mean dependent var 126863.7

Adjusted R-squared 0.976423 S.D. dependent var 50204.56

S.E. of regression 7708.746 Akaike info criterion 20.74112

Sum squared resid 1.96E+10 Schwarz criterion 20.75260

Log likelihood -3431.655 Durbin-Watson stat 0.383130

all variablesall variables

Dependent Variable: AVGHOMESALES

Method: Least Squares

Date: 11/20/02 Time: 18:03

Sample: 1975:01 2002:07

Included observations: 331

Variable Coefficient Std. Error t-Statistic Prob.

CPI -2620.066 479.5200 -5.463935 0.0000

PPI 1900.434 253.7132 7.490481 0.0000

UNEMP_RATE -1308.266 486.8899 -2.686985 0.0076

INCPERCAP 8.775442 0.947094 9.265654 0.0000

MRTG_RATE -657.8159 311.1963 -2.113829 0.0353

MONTHS 385.3148 172.7806 2.230081 0.0264

C 30352.78 12264.19 2.474911 0.0138

R-squared 0.984578 Mean dependent var 126863.7

Adjusted R-squared 0.984292 S.D. dependent var 50204.56

S.E. of regression 6292.141 Akaike info criterion 20.35291

Sum squared resid 1.28E+10 Schwarz criterion 20.43332

Log likelihood -3361.407 F-statistic 3447.484

Durbin-Watson stat 0.615215 Prob(F-statistic) 0.000000

time vs home pricetime vs home price

Dependent Variable: AVGHOMESALES

Method: Least Squares

Date: 11/20/02 Time: 18:39

Sample: 1975:01 2002:07

Included observations: 331

Variable Coefficient Std. Error t-Statistic Prob.

MONTHS 517.8749 4.625557 111.9595 0.0000

C 40896.51 885.9602 46.16066 0.0000

R-squared 0.974425 Mean dependent var 126863.7

Adjusted R-squared 0.974347 S.D. dependent var 50204.56

S.E. of regression 8041.062 Akaike info criterion 20.82853

Sum squared resid 2.13E+10 Schwarz criterion 20.85151

Log likelihood -3445.122 F-statistic 12534.92

Durbin-Watson stat 0.341824 Prob(F-statistic) 0.000000

Avg Home Price over Time

y = 518.47x + 40830R2 = 0.9749

0

50,000

100,000

150,000

200,000

250,000

0 50 100 150 200 250 300 350

Months starting at 1975

Mea

n H

ome

Pric

e

Further Analysis Further Analysis

Changes in income per capita have no effect on changes in mean home prices

This is also true for changes in mortgage, unemployment rates, S&P and CPI.

change income per cap vs change home price

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

-0.01 -0.005 0 0.005 0.01 0.015 0.02 0.025 0.03

% change income per capita

% c

hang

e m

ean

hom

e pr

ice

change morgage rate vs change mean ave home price

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

-0.2 -0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2

% change morgage rate

% c

hang

e m

ean

hom

e pr

ice

change unemployment vs change home price

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

-0.1 -0.08 -0.06 -0.04 -0.02 0 0.02 0.04 0.06 0.08 0.1

% change unemployment rate

% c

hang

e m

ean

hom

e pr

ice

S&P Index vs Avg Home Price

y = 42345Ln(x) - 146309R2 = 0.9608

10,000

100,000

1,000,000

0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000

S&P Index

Mea

n H

ome

Pric

e

ConclusionsConclusions

1) real estate prices move in long-term cycles

2) time is most significant variable; it that helps explain price increases:

Avg Home Price over Time

y = 518.47x + 40830R2 = 0.9749

0

50,000

100,000

150,000

200,000

250,000

0 50 100 150 200 250 300 350

Months starting at 1975

Mea

n H

ome

Pric

e

Center for Economic and Policy Research

-in the last 7 years, home sale prices have increased nearly 30 percent more than the overall rate of inflation

-there is no obvious explanation for a sudden increase in relative demand for housing which could explain the price rise

- the only plausible explanation for sudden surge in home prices is the existance of a housing bubble

-major factor driving housing sales is the expectation that housing prices will be higher in the future

- the collapse of the bubble will lead to a loss of between $1.3 trillion and $2.6 trillion of housing wealth

Questions Questions

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