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Published in: Journal of Economics and Finance 3/2022

07-04-2022

Mortgage rate predictability and consumer home-buying assessments

Author: Hamid Baghestani

Published in: Journal of Economics and Finance | Issue 3/2022

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Abstract

This study aims to examine whether US consumer home-buying assessments can potentially help reduce the random walk prediction errors of mortgage rates. Forecast evaluations under flexible loss reveal that the random walk predictions for 1992–2020 imply asymmetric loss, meaning that they are of value to a user who assigns more (less) cost to over-predictions (under-predictions). Further results indicate that such survey measures as consumer home-buying attitudes and consumer opinion about interest rates can help improve the accuracy of the random walk predictions of mortgage rates. As such, we recommend that forecasters consider using such survey measures in predicting mortgage rates.

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Footnotes
1
See also Pesando (1980), Reichenstein (1989), Reichenstein and Shetty (1993), Brooks and Gray (2004), Baghestani, Jung, and Zuchegno (2000), Mitchell and Pearce (2007), Spiwoks, Bedke, and Hein (2009), Baghestani (2010), Baghestani and Marchon (2012), Baghestani and Danila (2014), Baghestani, Arzaghi, and Kaya (2015), Baghestani (2016), Baghestani and Kaya (2016), Filiz, Nahmer, Spiwoks, and Bizer (2019), and Fassas, Papadamou, and Kenourgios (2022).
 
2
Baghestani (2005) and Baghestani (2019) show that the consensus forecasts of growth and inflation from the Survey of Professional Forecasters (SPF) help improve the accuracy of SPF interest rate forecasts. The SPF forecasts are available on the Federal Reserve Bank of Philadelphia website.
 
3
The same procedure is used for generating the forecasts made for the months between August 1991 and June 2020. The data on the 15-year mortgage rate are available starting August 1991 on FRED.
 
4
Baghestani (2022) shows that disaggregated consumer responses to this survey question help improve the accuracy of Federal Reserve forecasts of growth in durables spending.
 
5
This is consistent with Baghestani and Fatima (2021, p. 61), who note, “consumers, on average, are optimistic about durables-buying conditions.”.
 
6
Baghestani (2021, p. 300) shows, “the random walk forecast errors [of gasoline prices] fail to be orthogonal to the difference of opinion of consumers about whether the next 12 months or so will be a good time or a bad time to buy a new vehicle, and to the difference of opinion of consumers about vehicle prices (but not interest rates).” Other related studies include Anderson, Kellogg, Sallee, and Curtin (2011) and Baghestani (2015).
 
7
For an analysis of consumer responses to this question, see Baghestani and Kherfi (2008).
 
Literature
go back to reference Baghestani H, Danila L (2014) Interest rate and exchange rate forecasting in the Czech Republic: Do analysts know better than a random walk? Finance a Uver: Czech Journal of Economics & Finance 64(4):282–295 Baghestani H, Danila L (2014) Interest rate and exchange rate forecasting in the Czech Republic: Do analysts know better than a random walk? Finance a Uver: Czech Journal of Economics & Finance 64(4):282–295
go back to reference Diebold FX, Lopez JA (1996) Forecast evaluation and combination, in Statistical Methods in Finance, Maddala, G. S. and Roa, C. R. (Eds), Vol. 14, pp. 241–268. North-Holland, Amsterdam Diebold FX, Lopez JA (1996) Forecast evaluation and combination, in Statistical Methods in Finance, Maddala, G. S. and Roa, C. R. (Eds), Vol. 14, pp. 241–268. North-Holland, Amsterdam
go back to reference Reichenstein W, Shetty S (1993) Rationality of no-change forecasts of US Treasury interest rates. Adv Quant Anal Finance Account 2(Part A):93–103 Reichenstein W, Shetty S (1993) Rationality of no-change forecasts of US Treasury interest rates. Adv Quant Anal Finance Account 2(Part A):93–103
go back to reference Spiwoks M, Bedke N, Hein O (2009) The pessimism of Swiss bond market analysts and the limits of the sign accuracy test – an empirical investigation of their forecasting success between 1998 and 2007. Int Bull Bus Adm 4:6–19 Spiwoks M, Bedke N, Hein O (2009) The pessimism of Swiss bond market analysts and the limits of the sign accuracy test – an empirical investigation of their forecasting success between 1998 and 2007. Int Bull Bus Adm 4:6–19
Metadata
Title
Mortgage rate predictability and consumer home-buying assessments
Author
Hamid Baghestani
Publication date
07-04-2022
Publisher
Springer US
Published in
Journal of Economics and Finance / Issue 3/2022
Print ISSN: 1055-0925
Electronic ISSN: 1938-9744
DOI
https://doi.org/10.1007/s12197-022-09578-8

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