ARE HOUSING PRICE CYCLES ASYMMETRIC? EVIDENCE FROM THE US STATES AND METROPOLITAN AREAS

Christophe André,John W Muteba Mwamba,Rangan Gupta

doi:10.3846/ijspm.2019.6361

Abstract

This paper investigates asymmetry in US housing price cycles at the state and metropolitan statistical area (MSA) level, using the Triples test (Randles, Flinger, Policello, &amp; Wolfe, 1980) and the Entropy test of Racine and Maasoumi (2007). Several reasons may account for asymmetry in housing prices, including non-linearity in their determinants and in behavioural responses, in particular linked to equity constraints and loss aversion. However, few studies have formally tested the symmetry of housing price cycles. We find that housing prices are asymmetric in the vast majority of cases. Taking into account the results of the two tests, deepness asymmetry, which represents differences in the magnitude of upswings and downturns, is found in 39 out of the 51 states (including the District of Columbia) and 238 out of the 381 MSAs. Steepness asymmetry, which measures differences in the speed of price changes during upswings and downturns, is found in 40 states and 257 MSAs. These results imply that linear models are in most cases insufficient to capture housing price dynamics.

Highlights

Housing market developments have played a major role in the Great Recession, the largest contraction in US output in decades
Few studies have formally tested the symmetry of housing price cycles, despite the existence of theoretical reasons for potential asymmetry and the implications for modelling and forecasting
Several reasons may account for asymmetry in housing prices, including non-linearity in their determinants and in behavioural responses, in particular linked to equity constraints and loss aversion

Summary

Introduction

Housing market developments have played a major role in the Great Recession, the largest contraction in US output in decades. Few studies have formally tested for asymmetry in aggregate housing prices Against this background, this paper investigates asymmetry in housing price series for the 50 US states plus the District of Columbia and 381 metropolitan statistical areas (MSAs) using monthly Freddie Mac House Price Indices spanning the period 1975:1-2015:6. This paper investigates asymmetry in housing price series for the 50 US states plus the District of Columbia and 381 metropolitan statistical areas (MSAs) using monthly Freddie Mac House Price Indices spanning the period 1975:1-2015:6 The choice of this dataset is motivated by. The Triples test distinguishes between positive and negative asymmetry, which is useful for the economic interpretation of the results We investigate both the deepness and steepness of cycles.

Brief literature review

Methodology: the Triples and Entropy tests

Results

Conclusions