On the Price Comovement of U.S. Residential Real Estate Markets

Abstract

This study addresses the recent performance of the U.S. residential real estate markets. We investigate the comovement among Case-Shiller Home Price Indices for 14 metropolitan areas between 1992 and 2008. We identify the portion of this comovement deemed as fundamental (excessive), which we define as the covariation that can (cannot) be attributed to common fundamental factors directly influencing real estate prices. We find that the degree of comovement in these markets increased over the sample period, most significantly so in the late 1990s, but that this increase is largely due to systematic sources of risk; the degree of excess comovement is a less important factor. Further analysis indicates that the dynamics of comovement among metropolitan U.S. residential real estate markets within the sample period are mostly attributable to underlying systematic real and financial factors, consistent with a greater fundamental integration of those markets. We discuss the implications of these results for the evolution of U.S. real estate prices over the last two decades and the ongoing credit crisis.