A New Measure of Real Estate Uncertainty Shocks

Abstract

The objective of this article is twofold: first, we construct a new uncertainty measure that is specific to the real estate sector; second, we compare our uncertainty measure to other well‐established measures in the literature, such as the Macro Uncertainty (MU) by Jurado, Ludvigson and Ng. We show that our Real Estate Uncertainty (REU) measure accounts for twice as much of variation in housing prices—and starts compared to the MU. Furthermore, vector autoregressions and Granger‐causality analysis show that our uncertainty measure affects housing starts—and prices—in contrast to the other uncertainty measures that affect only housing starts.

Price and volatility linkages between international REITs and oil markets

“…In particular, volatility transmission results show decreasing diversification capacity of oil markets with portfolios containing REITs. Finally, the negative implications of a shock to either of the markets is likely to be prolonged due to the bidirectional feedback effect, and in turn, this could have long-term economical outcomes (Nguyen-Thanh, 2018;van Eyden et al, 2019). Hence, policymakers need to give increased attention to the interaction between these markets as even short-term shocks can be detrimental for the economy in the long-run as history has shown.…”

The role of real estate uncertainty in predicting US home sales growth: evidence from a quantiles-based Bayesian model averaging approach

“…Our data set covers the monthly period of 1970:07 to 2017:12, with the start and end date being purely driven by the availability of the real estate uncertainty (REU) index developed by Nguyen-Thanh et al, (2018), whose methodological framework for the construction of the REU measure follows that of Jurado et al, (2015). Specifically speaking, the macroeconomic uncertainty (MU) and financial uncertainty (FU) measures of Jurado et al, (2015) and Ludvigson et al, (2019), is the average time-varying variance in the unpredictable component of 134 macroeconomic and 148 financial time-series respectively, i.e., it attempts to capture the average volatility in the shocks to the factors that summarize real and financial conditions.…”

“…Alternatively, their decision to keep increasing home sales could be due to the fact that they believe real estate uncertainty will increase further in the future, and hence, it is a rational choice to invest more into housing now. This is because, home-buying is considered as a safer asset relative to other liquid financial investments (Aye et al, forthcoming), which in turn are likely to be affected due to the spillover of real estate uncertainty on to the general macroeconomy and financial markets, given the strong correlation across the measures of uncertainties (Nguyen-Thanh et al, 2018). This latter line of reasoning seems to be corroborated by the fact that real-estate uncertainties at medium-and long-horizons positively affect home sales growth, primarily at its upper quantiles.…”

“…More recently, in the wake of the "Great Recession", large number of studies have attempted to measure uncertainty (a latent variable) using various methods, and have also analysed the impact of the same on the general macroeconomy and the financial sector (see, Chuliá et al, (2017) and Gupta et al, (2018) for detailed reviews in this regard). Building on this line of research, and given the role of the housing sector in the global financial crisis, Nguyen-Thanh et al, (2018) has recently developed a real estate-specific measure of uncertainty. Using a vector autoregressive (VAR) model, these authors showed that the real estate uncertainty index has a significant negative impact on housing market related variables, such as housing prices and starts, and construction employment, but the impact on home sales was not analyzed.…”

“…Using a vector autoregressive (VAR) model, these authors showed that the real estate uncertainty index has a significant negative impact on housing market related variables, such as housing prices and starts, and construction employment, but the impact on home sales was not analyzed. 2 Given this, the objective of our paper is to analyze for the first time, the role of the real estatespecific measure of uncertainty of Nguyen-Thanh et al, (2018), in predicting growth of aggregate US home sales. In the process, we aim to add to the above-mentioned literature of home sales prediction in the US, by incorporating the role of real estate uncertainty (along with metrics of macroeconomic and financial uncertainties), over and above the standard predictors used in the studies mentioned above.…”