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Methodology: Zillow Rent Forecast

By Elisa Sheng on 29 Dec 2015

The Zillow Rent Index (ZRI) estimates median rent for a geographical region on a monthly basis. The Zillow Rent Forecast is our prediction of ZRI over the coming year.

Methodology

We forecast ZRI for thousands of areas, at six geographic levels: ZIP code, city, county, metropolitan area, state and nation. For each region within each geography, we use a two-stage approach:

1. predict baseline forecasts
2. adjust the baseline forecasts to be “consistent” across all geographic levels

The purpose of the second step is to ensure predictions from smaller regions (e.g. states) are consistent with predictions for a larger region (e.g. nation) composed of smaller areas. Specifically, we adjust the baseline monthly predictions so the percentage change in ZRI at the larger geography is approximately equal to the weighted average of the percentage change in ZRI of the smaller geographies, where weights are determined by property counts.

Notation

Let  denote the geographic level ( where 1=nation, 2=state, etc.). Let  denote a region within a geographic level ( where  is the number of regions in the  geographic level, e.g.  for the 50 states and Washington, D.C.). Let  denote the month of the time series with  for the current month. Let  denote ZRI for the  region of  geographic level at month . Let .

Baseline Forecasts

For each region  of each geography  we fit an ARIMA model with parameters chosen to minimize AICc to predict baseline forecasts, .

We also considered including covariates in the model, including: inventory, Zillow Home Value Index (ZHVI), median household income, unemployment rate and number of permits applied for. However, we did not find that models including covariates improved accuracy over the models without covariates.

Consistency Adjustment

We adapt Hyndman et al.’s approach of optimally combining forecasts for hierarchical time series in order to make our baseline forecasts “consistent” across the six geographic levels.[1] We define forecasts to be consistent when the month-over-month percentage change at a higher level (e.g. state) is approximately equal to the weighted average of the the month-over-month percentage changes at lower levels (e.g. metropolitan areas, counties, etc.) where weights are determined by property counts. The purpose of the consistency adjustment is to reconcile forecasts across the inherent geographical hierarchy of the ZRI time series: States are nested within the nation, metropolitan areas are nested within states, etc.

More formally, consistency is defined as:

for  and  where  is a noise term. The weight  if the  region of geography  does not fall within the boundaries of the  region of geography  (e.g. the Seattle metro area has a weight of zero for all states but Washington). The non-zero weights are determined by the proportion of properties in  relative to . We can reparametrize (1) as follows:

where  is a  matrix of weights,  is an unknown -vector of mean ZRI for the lowest geographic level and  is the vector of noise terms.

Assuming  where  is a -vector of noise terms for the lowest geographic level, equation (2) is a linear regression model whose best linear unbiased estimator for  is , which motivates the definition of the adjusted forecasts:

for .

Model Accuracy

To examine the forecasts’ accuracy, we compare mean absolute percentage error (MAPE) to a naive model,  for . Since we have relatively short time series, we average MAPE over forecasts using 12-to-35 months of data. The percent improvement of the ARIMA models over the naive model, as well as the p-value from 2-sample paired t-tests comparing the ARIMA and naive model, are shown in the following table:The naive forecasts were surprisingly accurate, but the ARIMA model forecasts significantly improved accuracy.

Seasonal Adjustment and Noise Reduction

To adjust for seasonality and reduce noise in the forecast, we apply two levels of smoothing. To adjust for seasonality, we first take a 3-month moving average of each region’s forecast, then apply a Seasonal and Trend decomposition using Loess. To reduce noise in the 12-month-out forecasts and maintain consistency with the ZRI, we average the current 12-month-out  seasonally-adjusted forecast with the prior two months’ seasonally-adjusted 12-month-out forecasts.

[1] Hyndman, R.J., Ahmed, R.A., Athanasopoulos, G. & Shang, H.L. (2011). Optimal combination forecasts for hierarchical time series. Computational Statistics & Data Analysis, 55(9): 2579-2589.