12:08 | Celia - Our model does account for the possibility of both overshooting and undershooting the equilibrium price, or the price that would be consistent with long term supply and demand drivers. The model uses past boom/bust cycles in housing to project the current cycle. In addition to a number of economic drivers, the model includes two factors that help control price cycles in the forecast. The first factor picks up the "simple trajectory", as you put it. It captures the tendency for prices to continue falling if they are falling and to continue increasing if they are increasing. The second factor is called the reversion to mean and will counter act the simple trajectory. This just means that if prices are falling for too long, they will be below the level supportable by the underlying economic drivers (like income, population growth). Homes will be cheap and people will start to buy them again, which will drive up house prices. We take a top down, bottom up approach to modeling. The difficulty in forecasting this time around, however, is that the severity of the cycle is unprecented. |
