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Is there a national housing market bubble brewing in the United States?

Published online by Cambridge University Press:  13 January 2023

Rangan Gupta ,
Jun Ma ,
Konstantinos Theodoridis  and
Mark E. Wohar
Rangan Gupta
Affiliation:
Department of Economics, University of Pretoria, Pretoria, 0002, South Africa
Jun Ma
Affiliation:
301 Lake Hall, Department of Economics, Northeastern University, Boston, MA, 02115 USA
Konstantinos Theodoridis
Affiliation:
Cardiff Business School, Cardiff University, Aberconway Building, Colum Drive, Cardiff CF10 3EU, UK European Stability Mechanism, 6a Circuit DE LA Foire Internationale, 1347 Luxembourg, Luxembourg
Mark E. Wohar*
Affiliation:
European Stability Mechanism, 6a Circuit DE LA Foire Internationale, 1347 Luxembourg, Luxembourg College of Business Administration, University of Nebraska at Omaha, 6708 Pine Street, Omaha, NE 68182, USA
*
*Corresponding author. Email: mwohar@unomaha.edu
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Abstract

We use a time-varying parameter dynamic factor model with stochastic volatility estimated using Bayesian methods to disentangle the relative importance of the common component in Federal Housing Finance Agency house price movements from state-specific shocks, over the quarterly period of 1975Q2 to 2017Q4. We find that the contribution of the national factor in explaining fluctuations in house prices is critical. We then use a Bayesian change-point vector autoregressive model that allows for different regimes throughout the sample period, to study the impact of aggregate supply, aggregate demand, (conventional) monetary policy, and term-spread shocks, identified based on sign restrictions on the national component of house price movements. While monetary policy and other shocks are found to be quite dominant early on, we find evidence that the national factor has been detached from the identified macroeconomic shocks since 2014, thus suggesting that a “national bubble” might be brewing again in the US housing market.

Keywords

House pricestime-varying dynamic factor modelchange-point vector autoregressive modelmacroeconomic shocks
Type
Articles
Information
Macroeconomic Dynamics , Volume 27 , Issue 8 , December 2023 , pp. 2191 - 2228
Copyright
© The Author(s), 2023. Published by Cambridge University Press

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Footnotes

†

We would like to thank two anonymous referees for many helpful comments. However, any remaining errors are solely ours. The views expressed in this paper solely represent those of the authors and should not be interpreted as the views of the European Stability Mechanism.

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