Dynamic concept

A time constant in the housing price dynamic process

House prices change over time and it is as a dynamic process subject to many control forces. A time constant is one of important parameters that characterize a dynamic process. Based on the time constant and assumed mathematical model of housing price dynamic process, one may be able to predict future housing prices.

In examining the histories of housing prices in the past fifty years in the U. S. and in Canada, I found that

1) A time constant when housing price increases varies in each economic cycle. They spread from a few years to over ten years.

2) A time constant of approximate five years when housing prices decrease and this is about the same for all major housing price cycles.

I have been puzzled because a time constant is inherent to a dynamic system and should be fixed. Earlier I thought I was able to explain it using an analogy of stroking times of air operated control valve, but now I feel the explanation was not very convinced.

The finding might nevertheless be helpful in believing that the U. S. housing market has bottomed out and has started to recover. In the current cycle, U. S. housing prices began to fall since 2007 and now it’s been five years in declining.