Can Tightness in the Housing Market Help Predict Subsequent Home Price Appreciation? Evidence from the U.S. and the Netherlands

This paper assesses the predictive power of variables that measure market tightness, such as seller's bargaining power and sale probabilities, on future home prices. Theoretical insights from a stylized search-and-matching model illustrate that such indicators can be associated with subsequent home price appreciation. The empirical analysis employs data on all residential units offered for sale through a real estate broker in the Netherlands and a large suburb in the Washington, DC area. Individual records are used to construct a quarterly home price index, an index that measures seller's bargaining power, and (quality adjusted) home sale probabilities. Using conventional time-series models we show that current sale probabilities and bargaining power can significantly reduce home price appreciation forecast errors.