'Ripple Effects' and Forecasting Home Prices in Los Angeles, Las Vegas, and Phoenix

We examine the time-series relationship between house prices in Los Angeles, Las Vegas, and Phoenix. First, temporal Granger causality tests reveal that Los Angeles house prices cause house prices in Las Vegas (directly) and Phoenix (indirectly). In addition, Las Vegas house prices cause house prices in Phoenix. Los Angeles house prices prove exogenous in a temporal sense and Phoenix house prices do not cause prices in the other two markets. Second, we calculate out-of-sample forecasts in each market, using various vector autoregessive (VAR) and vector error-correction (VEC) models, as well as Bayesian, spatial, and causality versions of these models with various priors. Different specifications provide superior forecasts in the different cities. Finally, we consider the ability of these time-series models to provide accurate out-of-sample predictions of turning points in house prices that occurred in 2006:Q4. Recursive forecasts, where the sample is updated each quarter, provide reasonably good forecasts of turning points