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Announcement: Introducing The Real Estate Number Cruncher

September 11th, 2013

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This blog post was originally published on the MoneyGeek.ca blog by Jin Choi. The website no longer exists, but Jin has graciously allowed us to re-publish his research for the benefit of future investors forever.

Dream Home: Everyone wants a dream home, but when should you buy, and how can you save up for the down payment? Use our new tool to help yourself with those questions.

If you're a young professional without a house to your name, the chances are, you want to own one some day. This real estate purchase will probably represent the biggest purchase of your life.

That's why we at MoneyGeek decided to build a tool that's designed to help you make smarter decisions on when to buy, and how to save up for a down payment. We decided to call this tool,

The Real Estate Number Cruncher

Housing Price Forecast Details

There are two versions of this tool. There is the public version, and the members only version. You can access the public version using the link above, or by going to Misc>Real Estate.

The public version only includes the forecasts for housing prices on the national level, while the members only version includes forecasts for different cities. As of right now, 21 different cities are represented in our forecasts.

Our algorithm analyses the Teranet - National Bank National Composite House Price Index , as well as the New Housing Price Index to arrive at its forecasts.

Let me explain how the algorithm works in broad strokes.

How Forecasts Are Generated

Our algorithm uses something called the 'Autoregressive Model'. It has a fancy name, but the concept is quite simple.

By using the model, we're implying that past trends in housing market data affects future trends. We find that housing prices usually have momentum, so if house prices have been going up the past few months, we'll likely see this continue into the next few months. Our algorithms quantify this phenemona and make forecasts based on it.

Note that this is very different from other financial markets, such as the stock market. If you analyze stock price histories, you'll find that momemtum is non-existent in stock prices. In other words, yesterday's stock price movements have no bearing on tomorrow's movements.

This is so because if you could predict stock prices with any degree of certainty, you could use the methodology and trade stocks to make profits for yourself. The banks and funds would employ this methodology until the methodology no longer works. When this happens, we say that the opportunity has been 'arbitraged away'.

However, the same doesn't happen in real estate because the real estate markets are illiquid. Buying and selling real estate costs a lot, and it takes a long time as well. That's why banks and most funds don't have any interest in trading real estate to take advantage of predictions.

Such absence of banks and funds creates opportunities for the average people like you and me. If we can take advantage of housing price forecasts to save even 1% of housing prices, that 1% could represent thousands of dollars in savings.

Forecast Accuracy

But of course, there's a caveat. The forecasts are unfortunately never completely accurate. The accuracy of forecasts vary from region to region. In some regions, the quality of the data makes us more confident about our forecasts while in others, we would feel less confident.

You'll see that we've not only provided you with the average forecast, but a range where future house price indices will fall in between. For some cities, the ranges are larger than others. We will try to improve on our forecasts and tighten the ranges, but we can't guarantee speedy progress on that front.

Down Payment Savings Planner

The second part of the Real Estate Number Cruncher consists of a tool designed to help you save for your down payment.

When you save up for your down payment, you can either invest your money safely by buying GICs, etc, or you can take a risk by investing in stocks or other risky assets. Going the safer route will virtually guarantee when you reach your desired savings target, whereas going the riskier route could help you reach your target sooner (but with no guarantees).

This part of the tool helps you visualize the 'what if's of taking each approach to save up for your down payment. We hope that by using this tool, you'll be able to make better decisions on how to save up for your down payment.

That's all that the Real Estate Number Cruncher provides for now. If you have questions, or even requests for new features, please talk to us using the comment box below.

Happy Planning.

This blog post was originally published on the MoneyGeek.ca blog by Jin Choi. The website no longer exists, but Jin has graciously allowed us to re-publish his research for the benefit of future investors forever.