Abstract
House prices are an important input to default and prepayment models used to project residential mortgage cash flows. I present a stochastic model of U.S. house prices to be used in valuing residential mortgages and other house price–dependent assets. The model generates a forecast of the full distribution of future house prices over long time horizons. The fundamental value of house prices is modeled as a function of rental rates and interest rates. House prices move relative to fundamental value based on serial correlation and mean-reversion dynamics. A 1,000-path Monte Carlo simulation of future house prices results in a positively sloped term structure of the expected volatility of house prices as of December 31, 2011. This slope flattens over certain horizons because of mean-reversion dynamics but steepens again because of the relation between house prices and interest rates. The model accounts for the changing relation between house prices and interest rates, and the importance of this relation in measuring the interest rate risk of mortgages is demonstrated. <b>TOPICS:</b>Real estate, MBS and residential mortgage loans, simulations, developed markets [US]
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
