Real estate lending forecasts are a great way to measure economic health and confidence. Real estate lending will continue to increase if economic indicators, such as a stable CPI, continue to be favorable. Price stability and low inflation encourage consumption and investment. A slowing of real estate investment would possibly indicate consumer anxiety with current economic conditions. The forecast horizon of two years will allows an examination of the effects of present economic conditions and interest rates.
The rest of this paper is organized as follows: Part 2. presents the
data used to forecast real estate lending as a function of CPI and the
30-year Treasury rate; Part 3. presents the theoretical basis for the approach
adopted in forecasting real estate lending; Part 4. presents forecasts
of real estate lending for 1999 and 2000; Part 5. evaluates the importance
of the forecast for the economy; and Part 6. discusses conclusions for
economic policy.
Real estate lending was used as an indicator of consumer willingness to invest. Alternative measures were considered for this forecast, such as mortgage lending; however, appropriate data were not available. Real estate lending gives an idea of how willing to enter the current market private and non-private investors are. The real estate lending data also gives a more encompassing view of investor activity than mortgage lending alone. The 30-year Treasury rate was selected as the most relevant interest rate, as it corresponds to the usual term of real estate loans. The CPI is used to show the rate of inflation. The CPI shows the price changes consumers incur in the market. The results of this forecast and current real estate lending data give an indication of how comfortable and adaptive the investor is with the current high level of price stability. The 30-year Treasury rate and CPI represent influences which affect investor willingness to seek real estate loans.
Nominal real estate lending data, from January 1992 through December 1998, are adjusted for inflation with the CPI. The real level of real estate lending, in billions of 1982-84 dollars, is computed as:
Inflation is defined as the percent change in the Consumer Price Index:
Recognizing the impact that price changes may have on the investment market, the Keynesian aggregate investment function is augmented with the CPI, and becomes:
Real estate lending is used as a measure of investment spending. The
right-hand-side variables are lagged two years to permit the investment
function to be estimated as a forecasting equation.
A regression estimate of this forecast equation is presented in Table 1.
Yearly/Monthly Forecast Periods | % D per Month | Billions $ Real Estate Lending | |
1999.1
|
January
|
72.48275
|
1314.875
|
1999.2
|
February
|
71.49297
|
1322.295
|
1999.3
|
March
|
69.5687
|
1320.542
|
1999.4
|
April
|
69.05798
|
1321.754
|
1999.5
|
May
|
69.49061
|
1325.752
|
1999.6
|
June
|
70.54699
|
1333.615
|
1999.7
|
July
|
72.1878
|
1341.019
|
1999.8
|
August
|
71.80411
|
1345.344
|
1999.9
|
September
|
72.55702
|
1353.665
|
1999.10
|
October
|
73.42967
|
1361.529
|
1999.11
|
November
|
71.76165
|
1368.343
|
1999.12
|
December
|
70.64443
|
1371.898
|
2000.1
|
January
|
4.538648
|
1374.552
|
2000.2
|
February
|
3.9978
|
1375.158
|
2000.3
|
March
|
4.06887
|
1374.274
|
2000.4
|
April |
4.547261
|
1381.858
|
2000.5
|
|
4.894334
|
1390.638
|
2000.6
|
June
|
4.664037
|
1395.815
|
2000.7
|
July
|
4.507557
|
1401.466
|
2000.8
|
August
|
4.723216
|
1408.887
|
2000.9
|
September
|
4.449758
|
1413.9
|
2000.10
|
October
|
4.57686
|
1423.844
|
2000.11
|
November
|
4.188894
|
1425.662
|
2000.12
|
December
|
4.383422
|
1432.034
|
Assuming this forecast turns out to be correct, the continuance of a healthy economy should be expected. A healthy economy is ultimately a function of confident consumers willing to buy and sell. The real estate market is not only a good indication of consumer confidence and willingness to invest, it is also a market with the potential to create employment. Jobs are created not only in the direct sales of real estate, but the potential employment of people in construction and other fields related to real estate development.
Continued expansion of real estate lending may result in higher interest
rates and inflationary pressure. America has rarely experienced such a
prolonged period of economic growth and expansion. Since interest rates
are currently low, investors demand high quantities of loanable funds.
Inflationary pressures will ultimately result in consumer grief if the
supply of loanable funds does not keep up with the demand, causing higher
interest rates.
Keynes, John Maynard, The General Theory of Employment Interest and Money, New York: Harcourt Brace & World, 1936.
Thomas, Lloyd B., Money, Banking, and Financial Markets, New York: McGraw-Hill, 1997.