Housing Price Cycle Interdependencies and Comovement: A Markov-Switching Approach

Abstract

This paper uses a Markov-switching approach to examine why there is house price cycle comovement across some U.S. metropolitan areas (MSAs) but not others, and which MSAs cluster together for each of these reasons. Past studies have attributed common housing downturns in different regions as possible explanations for comovement. We explore other channels, and find some clusters based on common industry concentration (such as information technology), house price elasticity, as well as a cluster of MSAs that are desirable for retirees (in the sun belt). We find seven clusters of MSAs, where each cluster experiences idiosyncratic house price downturns, plus one distinct national house price cycle. Notably, only the housing downturn associated with the Great Recession spread across all the MSAs in our sample; all other house price downturns remained contained to a single cluster. We also identify MSA economic and geographic characteristics that correlate with housing price cluster membership, which implies comovement due to mobility of residents. In addition, while prior research has found housing and business cycles to be related closely at the national level, we find very different house price comovement and employment comovement across clusters and across MSAs.