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A Spatio-Temporal Model of House Prices in the US

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Author Info
Sean Holly () (CIMF, University of Cambridge)
M. Hashem Pesaran () (CIMF, University of Cambridge and IZA Bonn)
Takashi Yamagata () (CIMF, University of Cambridge)

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Abstract

The purpose of this paper is to apply recent advances in the econometrics of panel data to a problem that has a clear spatial dimension. We model the dynamic adjustment of real house prices using data at the level of US States. In the last decade, in most OECD countries there has been a significant rise in real house prices. This attracted the attention of many international organisations and central banks. In this paper 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 then 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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Publisher Info
Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2338.

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Length: 31 pages
Date of creation: Sep 2006
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Handle: RePEc:iza:izadps:dp2338

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Related research
Keywords: house price; cross sectional dependence; spatial dependence;

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Find related papers by JEL classification:
C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data

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References listed on IDEAS
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Alexander Chudik & M. Hashem Pesaran, 2009. "Infinite-dimensional VARs and factor models," Working Paper Series 998, European Central Bank. [Downloadable!]
    Other versions:
  2. Isabel Vansteenkiste & Paul Hiebert, 2009. "Do house price developments spill over across euro area countries? Evidence from a Global VAR," Working Paper Series 1026, European Central Bank. [Downloadable!]
  3. Isabel Vansteenkiste, 2007. "Regional housing market spillovers in the US - lessons from regional divergences in a common monetary policy setting," Working Paper Series 708, European Central Bank. [Downloadable!]
  4. Ryan R. Brady, 2007. "Measuring the persistence of spatial autocorrelation: How long does the spatial connection between housing markets last?," Departmental Working Papers 19, United States Naval Academy Department of Economics. [Downloadable!]
  5. Rose Cunningham & Ilan Kolet, 2007. "Housing Market Cycles and Duration Dependence in the United States and Canada," Working Papers 07-2, Bank of Canada. [Downloadable!]
  6. Konstantin A. Kholodilin & Jan-Oliver Menz & Boriss Siliverstovs, 2007. "What Drives Housing Prices Down?: Evidence from an International Panel," Discussion Papers of DIW Berlin 758, DIW Berlin, German Institute for Economic Research. [Downloadable!]
  7. Koetter, Michael & Poghosyan, Tigran, 2008. "Real estate markets and bank distress," Discussion Paper Series 2: Banking and Financial Studies 2008,18, Deutsche Bundesbank, Research Centre. [Downloadable!]
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