Time-varying Persistence of House Price Growth: The Role of Expectations and Credit Supply

High persistence is a prominent feature of price movements in U.S. housing markets, i.e., house prices grow faster this period if they grew faster last period. This paper provides two additional new insights to the literature on U.S. house price movements. First, there exists a significant time variation in the persistence of house price growth, both at the national and city level. Second, there is considerable heterogeneity in the time-varying persistence across different regions, particularly in areas that were historically less persistent, such as the capital-poor regions in the Midwest and South. This study conducts additional regression analyses to determine the main factor behind the time-varying persistence, with a particular focus on two housing demand factors: extrapolative expectations and credit supply expansion. Our results suggest that the time variation in the persistence of urban house price growth is better aligned with credit supply expansion than with extrapolative expectations. These findings remain robust even when accounting for potential endogeneity and reverse causality concerns.