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Rational expectations in housing markets: the case of survey forecasts
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Forest, James, Li, Tao
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Spring 2025
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2025-05
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Doronkina_Honors.pdf
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This paper examines the rational expectations hypothesis within the U.S. housing market using econometric methods to evaluate forecast efficiency and bias. The study focuses on five key housing indicators—building permits, construction spending, existing home sales, new home sales, and housing starts—spanning both pre- and post-2006 housing boom periods. By employing methods such as Augmented Dickey-Fuller (ADF) tests, Dynamic Ordinary Least Squares (DOLS) cointegration regressions, Mincer-Zarnowitz (MZ) bias tests, and anchoring bias tests, the research uncovers varying degrees of stationarity and cointegration across indicators, revealing inefficiencies in forecast accuracy. Results show significant biases in some forecast series, indicating that housing market expectations may not fully reflect all available information. This work provides critical insights into the complex dynamics of housing market forecasts and contributes to improving predictive models. These findings are valuable for policymakers and economists seeking to enhance forecasting methodologies, especially in markets prone to volatility and speculative bubbles.
Keywords: finance, business analytics, rational expectations, housing market, forecast bias, Mincer-Zarnowitz regression, anchoring bias, DOLS regression.
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