ARE REAL HOUSE PRICES LIKELY TO DECLINE BY 47-PERCENT

Mankiw and Weil have estimated a demographically-driven real house price equation on annual data from the 1947-1987 period and used it to forecast real house prices over the 1988-2007 period. The result is their infamous 47 percent real decline. Their equation really only fits data from the 1950s and 1960s. Not only is the post-1970 fit poor, but the cumulative in-sample forecast for the 1970-1987 period is off by a factor of four. While real house prices seem more likely to decline than increase over the next two decades, a 47 percent decline seems far beyond the realm of the plausible.