The Risk Lighthouse methodology calculates actuarial values by employing a control mechanism on the metro level housing price index so that it doesn’t deviate too high or too low from the fundamentals. The control mechanism is achieved through adjusted quarterly price change rates. We set both a time-varying cap and floor for the quarterly price change rate, which are set at one standard deviation above and below the moving-average quarterly change rate minus a drift term. The drift term is calibrated by incorporating macro, micro, and metro-specific data on the economic and demographic factors that affect supply and demand. Analysis of these factors is done in several steps.
We consider factors that affect supply in the housing market. We classify sellers in the market as either “willing-to-sell” or “forced- to-sell. ”We further divide the forced-to-sell category into sub- categories of (1) foreclosures, (2) newly built houses, (3) migration outflow, and (4) death of homeowner. We compile the percentage distributions of these sub-categories. We compare construction costs relative to housing prices in projecting housing inventory.
We explore factors that affect demand in the housing market. We compile metro-specific household income distributions, which contains richer information than the median income. We find that a higher percentile income (e.g., 65th percentile) is more relevant than the median income for analyzing the demand for housing. We track how volumes of international sales and metro-specific age distributions affect the demand of housing units. We highlight limitations of pure econometric analysis; for example, the foreclosure rate from 2008 to 2009 explained most of the variations in housing prices across zip codes, but that relationship completely disappeared in year 2010.
We calibrate actuarial values at metropolitan levels based on an overall analysis of the metro-specific housing market dynamics, reflecting major factors affecting the supply and demand of houses. We present the calculated actuarial housing values for several major U.S. metro areas.
The actuarial housing values can potentially help lenders and regulators in assessing collateral risk at the portfolio level. The actuarial housing values can be extended to other international markets. In the appendix of this paper we also provide some discussions of the different characteristics of China’s housing markets.
Keywords: house market vaules, actuarial housing values
