What can Fifty-Two Collateralizable Wealth Measures tell us about Future Housing Market Returns? Evidence from U.S. State-Level Data

We use a novel U.S. state-level database to evaluate the role of housing wealth as a provider of collateral services. First, we estimate the cointegrating relationship between housing wealth and labour income for all 50 states, as well as the District of Columbia (D.C.), and overall U.S. We do not find evidence of a structural break in such link due to the presence of economic recessions or financial crises. Then, we assess the predictive ability of the housing wealth-to-income ratios (labelled by hwy) for state-level future real housing returns. We uncover: (i) positive estimates for the elasticity of housing wealth with respect to labour income, which are also largely heterogeneous across U.S. states; and (ii) a negative link between the housing wealth-to-income ratios and future housing returns, albeit the forecasting power of hwy also varies considerably across states. We conclude that country-level regressions typically "mask" this diversity of features surrounding the usefulness of housing in collateral provision and unfavourable labour income shock smoothing that state-level frameworks are able to recover.