Forecasting Changes in House Prices Under Asymmetric Loss: Evidence from the WSJ Forecast Poll

The U.S. subprime mortgage crisis has witnessed that house prices may have a profound effect on the economy. A key question for researchers and policymakers is what can be learnt from forecast changes in house prices. We use survey data from the WSJ forecast poll to analyze this question. Forecasts of changes in U.S. house prices are consistent with cross-sectional heterogeneity across forecasters with respect to the shape of their loss function. Forecasters’ loss function often appears to be asymmetric with respect to the forecast error, especially in the case of medium-term forecasts. Assuming an asymmetric loss function often (but not always) makes forecasts look rational. The asymmetry of forecasters’ loss function tended to increase during the recent recession, but this increase was not persistent.