One Man’s Bubble Is Another Man’s Rational Behavior: Comparing Alternative Macroeconomic Hypotheses for the US Housing Market
Abstract
:1. Introduction
2. Literature Review
3. A Neural Network Framework
Methodology for Testing Bubbles
4. Hypotheses and Analysis
Comparison of Results and Bubble Tests
5. Conclusions
Author Contributions
Funding
Data Availability Statement
Conflicts of Interest
Appendix A. Data from the St. Louis FRED Database (Accessed 25 October 2022)
Type | FRED Identifier | Description | H1 | H2 | H3 | H4 | H5 | H6 | H7 | H8 | H9 | H10 |
NSA | COMPUTNSA | New Privately Owned Housing Units Completed: Total Units, Thousands of Units, Monthly, Not Seasonally Adjusted | x | x | x | |||||||
NSA | CSUSHPINSA | S&P/Case–Shiller U.S. National Home Price Index, Index Jan 2000 = 100, Monthly, Not Seasonally Adjusted | x | x | x | x | x | x | x | |||
NSA | UMCSENT | University of Michigan: Consumer Sentiment, Index 1966: Q1 = 100, Monthly, Not Seasonally Adjusted | x | x | ||||||||
NSA | AUTHNOTT | New Privately Owned Housing Units Authorized but Not Started: Total Units, Thousands of Units, Monthly, Not Seasonally Adjusted | x | x | ||||||||
NSA | MICH | University of Michigan: Inflation Expectation, Percent, Monthly, Not Seasonally Adjusted | x | |||||||||
NSA | FEDFUNDS | Federal Funds Effective Rate, Percent, Monthly, Not Seasonally Adjusted | x | x | x | x | x | |||||
NSA | IPB50001N | Industrial Production: Total Index, Index 2017 = 100, Monthly, Not Seasonally Adjusted | x | x | x | |||||||
NSA | KCFSI | Kansas City Financial Stress Index, Index, Monthly, Not Seasonally Adjusted | x | |||||||||
NSA | MSPNHSUS | Median Sales Price for New Houses Sold in the United States, Dollars, Monthly, Not Seasonally Adjusted | x | x | ||||||||
NSA | PAYNSA | All Employees, Total Nonfarm, Thousands of Persons, Monthly, Not Seasonally Adjusted | x | x | x | |||||||
NSA | HOUST1FNSA | New Privately Owned Housing Units Started: Single-Family Units, Thousands of Units, Monthly, Not Seasonally Adjusted | x | |||||||||
NSA | CNP16OV | Population Level, Thousands of Persons, Monthly, Not Seasonally Adjusted | x | |||||||||
NSA | CUUR0000SEHA | Consumer Price Index for All Urban Consumers: Rent of Primary Residence in U.S. City Average, Index 1982–1984 = 100, Monthly, Not Seasonally Adjusted | x | |||||||||
NSA | EMVMACROCONSUME | Equity Market Volatility Tracker: Macroeconomic News and Outlook: Consumer Spending and Sentiment, Index, Monthly, Not Seasonally Adjusted | x | |||||||||
NSA | EPUMONETARY | Economic Policy Uncertainty Index: Categorical Index: Monetary policy, Index, Monthly, Not Seasonally Adjusted | x | x | x | |||||||
NSA | MORTGAGE30US | 30-Year Fixed Rate Mortgage Average in the United States, Percent, Monthly, Not Seasonally Adjusted | x | x | x | x | x | |||||
NSA | MSACSRNSA | Monthly Supply of New Houses in the United States, Months’ Supply, Monthly, Not Seasonally Adjusted | x | x | ||||||||
NSA | NFCI | Chicago Fed National Financial Conditions Index, Index, Monthly, Not Seasonally Adjusted | x | |||||||||
NSA | T10Y2YM | 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity, Percent, Monthly, Not Seasonally Adjusted | x | x | ||||||||
NSA | USACPIALLMINMEI | Consumer Price Index: All Items for the United States, Index 2015 = 100, Monthly, Not Seasonally Adjusted | x | |||||||||
NSA | WALCL | Assets: Total Assets: Total Assets (Less Eliminations from Consolidation): Wednesday Level, Millions of U.S. Dollars, Monthly, Not Seasonally Adjusted | x | x | x | |||||||
SA | BOPGSTB | Trade Balance: Goods and Services, Balance of Payments Basis, Millions of Dollars, Monthly, Seasonally Adjusted | x | x | x | x | ||||||
SA | COMPU1USA | New Privately Owned Housing Units Completed: Single-Family Units, Thousands of Units, Monthly, Seasonally Adjusted Annual Rate | x | |||||||||
SA | CSUSHPISA | S&P/Case–Shiller U.S. National Home Price Index, Index Jan 2000 = 100, Monthly, Seasonally Adjusted | x | x | x | |||||||
SA | DSPI | Disposable Personal Income, Billions of Dollars, Monthly, Seasonally Adjusted Annual Rate | x | x | ||||||||
SA | HOUST1F | New Privately Owned Housing Units Started: Single-Family Units, Thousands of Units, Monthly, Seasonally Adjusted Annual Rate | x | |||||||||
SA | HSN1F | New One Family Houses Sold: United States, Thousands, Monthly, Seasonally Adjusted Annual Rate | x | |||||||||
SA | UNEMPLOY | Unemployment Level, Thousands of Persons, Monthly, Seasonally Adjusted | x | |||||||||
SA | PCEDG | Personal Consumption Expenditures: Durable Goods, Billions of Dollars, Monthly, Seasonally Adjusted Annual Rate | x | x | ||||||||
SA | EMRATIO | Employment-Population Ratio, Percent, Monthly, Seasonally Adjusted | x | |||||||||
SA | INDPRO | Industrial Production: Total Index, Index 2017 = 100, Monthly, Seasonally Adjusted | x |
1 | See the Dallas Fed’s house price database, which updates quarterly exuberance indicators based on price-to-fundamentals and price-to-rent ratios, https://www.dallasfed.org/research/international/houseprice (accessed on 9 August 2023). |
2 | Machine learning has been applied to many housing market studies; see Xu and Zhang (2021) for a review of this work. Since bubble identification is a joint hypothesis, our approach is to use a model-free approach focused on using specific features associated with a macro narrative as a base for comparison. |
3 | We employ IBM Modeler; for details, see the Modeler 18 Algorithms Guide, p. 311. |
4 | A comparison of our macro results with the micro exuberance indicators using supremum augmented Dickey–Fuller (SADF) and generalized SADF (GSADF) reported by the Dallas Fed in their International House Price Database suggests that a macro model may provide useful information on the housing price extreme drivers. The SADF test shows exuberance or a bubble before the GFC based on price or price-to-fundamental ratios; however, it does not provide any insight on macro drivers or macro narratives that can explain a bubble. |
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Hypotheses | Variables |
---|---|
Housing and Macroeconomic Variables | |
H1 NSA Macroeconomic variables | Consumer Price Index All (CPI) annualized change, Consumer Price Index Rent annualized change (CPIR), Non-Farm payroll number (NFP), Industrial Production annualized change (IP), 30-year Mortgage Rate (MORT), macro news (MACRO), and Economic Policy Uncertainty Index (EPU) |
H2 SA Macroeconomic variables | Durable goods (DGOOD), Disposable income (DINC), Trade balance (TBAL), Employment/population ratio (EMRATIO), Unemployment level (UNEMPLOY), Industrial production (IP) |
Housing driven by monetary policy | |
H3 NSA credit variables | 30-year Mortgage Rate (MORT), Treasury 10-year/2-year spread (TSPREAD), Fed Funds (FFUND), EPU monetary index (EPUM) |
H4 NSA credit with Fed assets | 30-year Mortgage Rate (MORT), Treasury 10-year/2-year spread (TSPREAD), Fed Funds (FFUND), EPU monetary index (EPUM), FedAssets (FEDA) |
Housing and global savings glut | |
H5 NSA target variable | 30-year Mortgage Rate (MORT), Trade balance (TBAL), Fed Funds (FFUND), FedAssets (FEDA) |
H6 SA target variable | 30-year Mortgage Rate (MORT), Trade balance (TBAL), Fed Funds (FFUND), FedAssets (FEDA) |
Housing supply and demand | |
H7 NSA variables | Monthly supply of new houses (HSUPPLY), new single-family houses sold (HSOLD), single-family housing units completed (HCOMPL), industrial production (IP), non-farm payroll (NFP) |
H8 SA variables | Monthly supply of new houses (HSUPPLY), new single-family houses sold (HSOLD), single-family housing units completed (HCOMPL), disposable income (DINC), durable goods (DGOOD), trade balance (TBAL) |
H9 Extends H7 by adding expectations | Monthly supply of new houses (HSUPPLY), new single-family houses sold (HSOLD), single-family housing units completed (HCOMPL), industrial production (IP), non-farm payroll (NFP), KC Fed stress index (STRESS), University of Michigan consumer sentiment (MSCENT), single-family units started/population level (HPOP), housing authorized but not started (HAUTH) |
Housing and price extrapolation | |
H10 Price lags and momentum | Case–Shiller prices lagged 1 period (CSLAG1), Case–Shiller prices lagged 6 period (CSLAG6), Fed funds (FFUND), housing units authorized but not started (HAUTH), single-family housing units completed (HCOMPL), Chicago Fed financial conditions (CFINCON), University of Michigan consumer sentiment (MCSENT), Michigan inflation expectations (MINFEX) |
Themes: | Housing and the Business Cycle | Housing Driven by Monetary Policy | Housing and Global Savings Glut | Housing Supply and Demand | Housing and Price | |||||
---|---|---|---|---|---|---|---|---|---|---|
H1 | H2 | H3 | H4 | H5 | H6 | H7 | H8 | H9 | H10 | |
Max Error | 0.106 | 0.06 | 0.256 | 0.102 | 0.152 | 0.172 | 0.166 | 0.085 | 0.103 | 0.03 |
Min Error | −0.122 | −0.072 | −0.199 | −0.083 | −0.085 | −0.125 | −0.172 | −0.044 | −0.072 | −0.021 |
Mean Abs Error | 0.028 | 0.013 | 0.044 | 0.017 | 0.022 | 0.029 | 0.026 | 0.012 | 0.015 | 0.005 |
Std Dev | 0.04 | 0.018 | 0.062 | 0.023 | 0.028 | 0.038 | 0.038 | 0.016 | 0.021 | 0.007 |
CUSUM test for each H; entire sample | reject * | accept | reject ** | accept | accept | accept | accept | accept | accept | accept |
CUSUM test for same sample Feb 2003–Jun 2022 | reject * | reject * | reject ** | accept | accept | accept | reject * | reject * | accept | accept |
Bubble period above 0.05 critical level | 5 Oct–22 Mar | 7 Mar–8 Feb | None | None | None | None | 4 May–6 Sep | 7 Nov–9 Sep | None | None |
Number of months above 0.05 critical level | 78 months | 12 months | None | None | None | None | 29 months | 19 months | None | None |
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Malliaris, A.G.; Malliaris, M.; Rzepczynski, M.S. One Man’s Bubble Is Another Man’s Rational Behavior: Comparing Alternative Macroeconomic Hypotheses for the US Housing Market. J. Risk Financial Manag. 2024, 17, 349. https://doi.org/10.3390/jrfm17080349
Malliaris AG, Malliaris M, Rzepczynski MS. One Man’s Bubble Is Another Man’s Rational Behavior: Comparing Alternative Macroeconomic Hypotheses for the US Housing Market. Journal of Risk and Financial Management. 2024; 17(8):349. https://doi.org/10.3390/jrfm17080349
Chicago/Turabian StyleMalliaris, Anastasios G., Mary Malliaris, and Mark S. Rzepczynski. 2024. "One Man’s Bubble Is Another Man’s Rational Behavior: Comparing Alternative Macroeconomic Hypotheses for the US Housing Market" Journal of Risk and Financial Management 17, no. 8: 349. https://doi.org/10.3390/jrfm17080349