Regional convergence and structural change in US housing markets

Abstract

If house prices are convergent at the national level, monetary policy is easier to implement, and labour has an easier time achieving mobility across regions. Accordingly there have been several studies on home price convergence. Some of these previous papers have methodological problems. This paper examines home price convergence across the different regions of the United States using Pesaran’s pairwise approach. This method obviates some of the methodological issues that have plagued previous studies. It also tests with a method that allows for structural breaks in the relationships between regional markets. Overall, it is found that the US housing market is not convergent across regions. Some evidence is found that the high-priced regions of New England and the Pacific exhibit convergence. Analysis of structural change reveals that some of the increase in co-movement between these expensive markets, and the decrease in co-movement between these and other markets, accelerated in the early to mid-1980s. The early 1980s saw major changes in US housing. Financialization, in the form of a greater role for non-depository investors such as real estate investment trusts (REITs), a big take-off in securitization, falling interest rates and more capital from abroad led to greater commodification of housing in terms of movement away from housing’s role as shelter and towards the exchange value of homes. These changes made credit available from new sources. This greater credit, including from global sources, appears to have played a role in creating divergent prices in regions that likely have differing elasticities of housing supply.