You have been asked to develop a model that will predict home prices as a function of important economic variables. After considerable research, you locate the work of Prof. Robert Shiller, Princeton University. Shiller has compiled data for housing costs beginning in 1890. The data file Shiller House Price Cost is obtained from his data. The indexes for home price and building cost are developed to adjust for price changes over time. You are to develop a model using the Shiller data. Prepare a short interpretation of your model results. Variables are identified in the data file.
a. Does your model exhibit any tendency to predict high or low over the long time period? What is your evidence?
b. There was a housing price bubble in the first part of the 21st century. How could you identify this bubble using your model?