Interregional correlations in the US housing market at three price tiers

Abstract

The goal of this paper is to observe the interregional correlations in the housing market at three price tiers (low, middle, and high) and examine differences in ripple effects at each housing price tier and the factors that influence these effects in each tier. Ripple effects in housing prices of 10 major metropolitan areas in the USA between January 1993 and March 2016 are examined, and this study finds that intercity ripple effects are larger in lower-cost houses. In addition, ripple effects continue to increase after February 2015 only for the low-tier sample. This indicates that intercity systemic risk is currently highest for low-tier houses. Further estimations reveal that money supply is the most crucial variable for determining the level of systemic risk. However, because high-price-tier properties are prone to disposition effects when house prices fall, ripple effects tend to drop sharply during housing market downturns, except for during the subprime mortgage crisis.