First, kudos to jg for trying what few have done. How many people have ever tried to make a real estate forecasting model? So my hat’s off to you.
However, I’ve got be honest and point out the model needs a lot of work. I want to be very careful to show the weakness in the model while still holding jg’s work in high regard.
FormerSanDiegan is right. You’ve got a bunch of data, and made an equation that fit the prices. The model seems to break down in the early 90’s, a period of falling prices. Since it breaks down when prices fall, how useful will it be when prices fall this time? Furthermore, NODs are a lagging indicator, so by the time NODs rise, prices have changed for a year already.
The model does not use ALL sales, i.e. resales plus new home sales? As builders are discounting heavily now and have overbuilt, new home sales are a big proportion of all sales; later in the cycle, as builders have stopped building, new homes sales will be negligible. Any model using only new home sales or only resales is using only half the data, but skewed data: it is weighed toward lower sales in the up cycle (bec. new home sales are a bigger percentage) and skewed down in the down cycle (as new homes are a smaller portion of sales).
The biggest weakness in the model is that it uses only demand, while ignoring supply.. Econ101: price is determined by demand and supply. How can you predict prices knowing only demand? How can you predict oil prices without knowing the OPEC output? If you are given only world demand,but not world supply, how can you? The same is true for real estate, and it is Campbell’s greatest flaw, and the reason I believe he has so many inaccuracies in his model. Campbell has several incorrect sell and buy signals, yet he was satisfied with his model enough to publish it? The guy should refund me the money for the book.
jg, I want to commend you for taking a stab at it, and I encourage you to project it forward, and find out exactly how far off you are. Then refine it by adding more data on sales and inventory. Perhaps unemployment, new home permits, consumer confidence, have an impact too. I admire your tenacity. It was a big task.
