Using Housing Futures in Mortgage Research

Abstract

Expectations in housing prices play an important role in real estate research. Despite its importance, obtaining a reasonable proxy for such expectation is a challenge. The existing literature in mortgage research either does not include proxies of housing expectations in empirical models or uses proxies such as the past year appreciation or time series forecasts.

This paper proposes to use the transaction prices of housing futures contracts as an alternative proxy. As an example, we compare the performances of four different proxies for expectations in explaining borrower mortgage default behavior. The results show that the futures based proxy outperforms other measures by having the highest regression model fit as well as being the only measure that shows a significant negative effect on mortgage default behavior. In addition, the paper shows that futures contain additional information that is not present in the past housing prices.

Keywords: housing futures, real estate futures, housing expectation, house price expectation, mortgage default