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Regional housing market spillovers in the US: lessons from regional divergences in a common monetary policy setting

  • Vansteenkiste, Isabel

In this paper, we seek to quantify the importance of state-level housing price spillovers and interest rate shocks to house price developments in the United States. The econometric approach involves an application of the recently developed global VAR (GVAR) as presented in Dées, DiMauro, Pesaran, and Smith (2005) and Pesaran, Schuermann, and Weiner (2004) to the 31 biggest US states over the period 1986-2005. Such an approach allows not only for the empirical derivation of the impact of common shocks (such as interest rate shocks) on US house price developments, but also for an analysis of the importance of interstate housing price spillovers. Beyond real house prices and real income per capita, each state-specific vector error correction model also includes nation-wide variables — measured as a weighted average of other states —. These individual state models are then linked in a consistent and cohesive manner. Impact elasticities indicate strong interregional linkages for both real house prices and real income per capita. An analysis of generalised impulse responses indicates that the importance of housing price spillovers is state dependent, with shocks occurring in states with relatively lower land supply elasticities having much stronger spillover effects that those in the other states. As regards real interest rates, the impact appears to be relatively small with an increase of 100 basis points in the real 10-year government bond yield resulting in a long run fall in house prices of between 0.5 and 2.5%. This would suggest, in line with DelNegro and Otrok (2005) that the decline in long-term interest rates is not the primary factor that has driven the recent surge in house prices in the United States. JEL Classification: C32, E44, R10, R31

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Paper provided by European Central Bank in its series Working Paper Series with number 0708.

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Date of creation: Jan 2007
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Handle: RePEc:ecb:ecbwps:20070708
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  1. M. Hashem Pesaran & Til Schuermann & Scott M. Weiner, 2002. "Modeling Regional Interdependencies Using a Global Error-Correcting Macroeconometric Model," Center for Financial Institutions Working Papers 01-38, Wharton School Center for Financial Institutions, University of Pennsylvania.
  2. Filippo di Mauro & L. Vanessa Smith & Stephane Dees & M. Hashem Pesaran, 2007. "Exploring the international linkages of the euro area: a global VAR analysis," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(1), pages 1-38.
  3. Gerald A. Carlino & Robert H. DeFina, 1999. "Do states respond differently to changes in monetary policy?," Business Review, Federal Reserve Bank of Philadelphia, issue Jul, pages 17-27.
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  6. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing High House Prices: Bubbles, Fundamentals and Misperceptions," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 67-92, Fall.
  7. repec:dgr:rugccs:200411 is not listed on IDEAS
  8. Dennis R. Capozza & Patric H. Hendershott & Charlotte Mack & Christopher J. Mayer, 2002. "Determinants of Real House Price Dynamics," NBER Working Papers 9262, National Bureau of Economic Research, Inc.
  9. Geraint Johnes & Thomas Hyclak, . "House Prices and Regional Labor Markets," Working Papers ec15/93, Department of Economics, University of Lancaster.
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  11. Joe Peek & James A. Wilcox, 2006. "Housing, Credit Constraints, and Macro Stability: The Secondary Mortgage Market and Reduced Cyclicality of Residential Investment," American Economic Review, American Economic Association, vol. 96(2), pages 135-140, May.
  12. Calvin Schnure, 2005. "Boom-Bust Cycles in Housing; The Changing Role of Financial Structure," IMF Working Papers 05/200, International Monetary Fund.
  13. Robert S. Chirinko & Leo de Haan & Elmer Sterken, 2004. "Asset Price Shocks, Real Expenditures, and Financial Structure: A Multi-Country Analysis," DNB Working Papers 014, Netherlands Central Bank, Research Department.
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  16. Pesaran, M. H. & Shin, Y. & Smith, R. J., 1997. "Structural Analysis of Vector Error Correction Models with Exogenous I(1) Variables," Cambridge Working Papers in Economics 9706, Faculty of Economics, University of Cambridge.
  17. Marco Del Negro & Christopher Otrok, 2005. "Monetary policy and the house price boom across U.S. states," FRB Atlanta Working Paper 2005-24, Federal Reserve Bank of Atlanta.
  18. Meen, Geoffrey, 2002. "The Time-Series Behavior of House Prices: A Transatlantic Divide?," Journal of Housing Economics, Elsevier, vol. 11(1), pages 1-23, March.
  19. Pesaran, M. H. & Shin, Y., 1997. "Generalised Impulse Response Analysis in Linear Multivariate Models," Cambridge Working Papers in Economics 9710, Faculty of Economics, University of Cambridge.
  20. Iacoviello, Matteo & Minetti, Raoul, 2008. "The credit channel of monetary policy: Evidence from the housing market," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 69-96, March.
  21. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
  22. Fratantoni, Michael & Schuh, Scott, 2003. " Monetary Policy, Housing, and Heterogeneous Regional Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(4), pages 557-89, August.
  23. Dennis R. Capozza & Charlotte Mack & Patric H. Hendershott & Christopher J. Mayer, 2002. "The Determinants of House Price Dynamics," ERES eres2002_106, European Real Estate Society (ERES).
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