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A Spatio-Temporal Model of House Prices in the US

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  • Holly, S.
  • Pesaran, M.H.
  • Yamagata. T.

Abstract

In this paper we model the dynamic adjustment of real house prices using data at the level of US States. We consider interactions between housing markets by examining the extent to which real house prices at the State level are driven by fundamentals such as real income, as well as by common shocks, and determine the speed of adjustment of house prices to macroeconomic and local disturbances. We take explicit account of both cross sectional dependence and heterogeneity. This allows us to find a cointegrating relationship between house prices and incomes and to identify a small role for real interest rates. Using this model we examine the role of spatial factors, in particular the effect of contiguous states by use of a weighting matrix. We are able to identify a significant spatial effect, even after controlling for State specific real incomes, and allowing for a number of unobserved common factors.

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Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0654.

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Length: 29
Date of creation: Sep 2006
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Handle: RePEc:cam:camdae:0654

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Keywords: House Price; Cross Sectional Dependence; Spatial Dependence;

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