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Integration and Contagion in US Housing Markets

  • John Cotter

    (School of Business, University College Dublin)

  • Stuart Gabriel

    (Anderson School of Management, University of California - Los Angeles)

  • Richard Roll

    (Anderson School of Management, University of California - Los Angeles)

This paper explores integration and contagion among US metropolitan housing markets. The analysis applies Federal Housing Finance Agency (FHFA) house price repeat sales indexes from 384 metropolitan areas to estimate a multi-factor model of U.S. housing market integration. It then identifies statistical jumps in metropolitan house price returns as well as MSA contemporaneous and lagged jump correlations. Finally, the paper evaluates contagion in housing markets via parametric assessment of MSA house price spatial dynamics. A R-squared measure reveals an upward trend in MSA housing market integration over the 2000s to approximately .83 in 2010. Among California MSAs, the trend was especially pronounced, as average integration increased from about .55 in 1997 to close to .95 in 2008! The 2000s bubble period similarly was characterized by elevated incidence of statistical jumps in housing returns. Again, jump incidence and MSA jump correlations were especially high in California. Analysis of contagion among California markets indicates that house price returns in San Francisco often led those of surrounding communities; in contrast, southern California MSA house price returns appeared to move largely in lock step. The high levels of housing market integration evidenced in the analysis suggest limited investor opportunity to diversify away MSA-specific housing risk. Further, results suggest that macro and policy shocks propagate through a large number of MSA housing markets. Research findings are relevant to all market participants, including institutional investors in MBS as well as those who regulate housing, the housing GSEs, mortgage lenders, and related financial institutions.

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Paper provided by Geary Institute, University College Dublin in its series Working Papers with number 201131.

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Length: 50 pages
Date of creation: 08 Nov 2011
Date of revision:
Handle: RePEc:ucd:wpaper:201131
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  9. Pukthuanthong, Kuntara & Roll, Richard, 2009. "Global market integration: An alternative measure and its application," Journal of Financial Economics, Elsevier, vol. 94(2), pages 214-232, November.
  10. Geert Bekaert & Campbell R. Harvey, 1994. "Time-Varying World Market Integration," NBER Working Papers 4843, National Bureau of Economic Research, Inc.
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  12. Jiang, George J. & Oomen, Roel C.A., 2008. "Testing for jumps when asset prices are observed with noise-a "swap variance" approach," Journal of Econometrics, Elsevier, vol. 144(2), pages 352-370, June.
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  14. Karl Case & John Cotter & Stuart Gabriel, 2011. "Housing risk and return: Evidence from a housing asset-pricing model," Papers 1103.5971, arXiv.org.
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