Economic Fundamentals, Subprime Lending and Housing Prices: Evidence from MSA-level Panel Data

Abstract

This study finds that employment, real construction cost and the real user cost of housing have a significant impact on real housing price over the 1990:Q2–2009:Q1 period for a panel of 20 metropolitan statistical areas (MSAs) in the US. Over the 2003–2005 period when subprime lending soared, all 20 MSAs experienced a rapid appreciation in real price. Nine MSAs with higher subprime lending relative to the rest experienced a larger appreciation and four of these nine MSAs with high prevalence of second home purchases experienced the highest appreciation rates. The findings are important to policy makers because they point out the importance of underlying economic factors in determining home prices. In general, policy makers at the local level should caution against a sudden surge in the price of homes that is not sustained by economic fundamentals, especially since the magnitude and effect of such shocks can vary considerably across MSAs.