U.S. Metropolitan House Price Dynamics

Using data for the 50 largest U.S. Metropolitan Statistical Areas (MSAs), this study contributes to the literature on regional heterogeneity in house price dynamics in several ways. We use recent advances in panel econometrics that allow for regional heterogeneity, cross-sectional dependence, and non- stationary but cointegrated data. We formally test for regional differences and explore the relationships between the price elasticity of housing supply and the income elasticity of prices, as well as bubble size and duration. The estimated mean long-term elasticity of house prices with respect to aggregate personal income is 0.86 across MSAs, but varies considerably between cities. Short-term momentum and reversion dynamics also show substantial regional heterogeneity. The dynamics are significantly associated with the price elasticity of housing supply. The long-term income elasticity generally is greater, short-term momentum is stronger, and adjustment towards the long-term fundamental price level is weaker in the more supply-inelastic MSAs. Hence, while house price cycles around long-term fundamental price levels typically are highly synchronized across MSAs within the same region, house price bubbles tend to be larger and longer-lasting in the MSAs with more inelastic housing supply.