Housing Prices and Fundamentals: The Role of a Supply Shifter

Durmaz, Nazif (2011): Housing Prices and Fundamentals: The Role of a Supply Shifter.

Abstract

This paper empirically investigates cointegrating relation between housing prices and economic fundamental variables in the US housing market. Employing simple yet rigorous econometric techniques, the present paper finds strong evidence in favor of cointegrating relations in most US states when both the demand and supply side fundamental variables are included in the cointegrating regression. This casts doubt on the previous empirical work that reported weak or no cointegrating relation of housing prices with mostly demand-side fundamental variables, which may have a misspecification problem. Further, cointegrating vector estimates seem consistent with economic theories only when both side fundamental variables are used.

• Item Type: MPRA Paper
• Language: English
• Keywords: Housing prices, cointegration
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location > R31 - Housing Supply and Markets

References

Abraham, Jesse M. and Patrick H. Hendershott (1996) “Bubbles in Metropolitan Housing Markets,” Journal of Housing Research 7, 191–207. Banerjee, Anindya (1999) “Panel Data Unit Roots and Cointegration: An Overview,” Oxford Bulletin of Economics and Statistics 61, 607–629. Capozza, Dennis R., Partic H.Hendershott, Charlotte Mack, and Christopher, J. Mayer (2002) “Determinants of Real House Price Dynamics," NBER Working Paper 9262. Engle, Robert F. and Clive W. J. Granger (1987) “Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, 55, 251-276. Gallin, Joshua (2006) “The Long-Run Relationship Between House Prices And Income: Evidence Form Local Housing Markets,” Real Estates Economics 34 (3), 417-438. Hin, David H. K. and Javier C. Cuervo (1999) “A Cointegration Approach To The Price Dynamics Of Private Housing: A Singapore Case Study,” Journal of Property Investment & Finance, 17 (1), 35-60. Holly, Sean, M. Hashem Peseran, and Takashi Yamagata (2006) “A Spatio-Temporal Model of House Prices in the US,” CESifo Working Paper, No. 1826. Johansen, Soren (1988) ”Statistical Analysis of Cointegration Vectors,” Journal of Economic Dynamics and Control,12: 231–54. MacKinnon, James (2010) "Critical Values for Cointegration Tests," Queens University, Economics Working Paper Series, 1227 Malpezzi, Stephen. (1999) “A Simple Error Correction Model of House Prices," Journal of Housing Economics, 8, 27-62. Meen, Geoffrey (2002) “The Time-Series Behavior of House Prices: A Transatlantic Divide?” Journal of Housing Economics, 11, 1–23. Mikhed, Vyacheslav and Petr Zemcik (2009) “Do house prices reflect fundamentals? Aggregate and panel data evidence,” Journal of Housing Economics, 18, 140-149. Park, Joon Y. (1992) “Canonical Cointegrating Regressions,” Econometrica, 60 (1): 119–143. Poterba, J. (1984) “Tax Subsidies to Owner-occupied Housing: An Asset-Market Approach,” Quarterly Journal of Economics, 99: 729–52. Shiller, Robert J. (2010) Building cost index. Available from http://www.econ.yale.edu/~shiller/data.htm Shiller, Robert J. and Pierre Perron (1985) “Testing the Random Walk Hypotheis: Power versus Frequency of Observation,” Economics Letters, 18: 381–386. Topel, R. and S. Rosen (1988) “Housing Investment in the United States,” Journal of Political Economy, 96: 718–740.