U.S. Regional Housing Bubbles, Their Co-Movements and Spillovers

Abstract

This paper provides empirical evidence for co-movement and spillover effects of regional housing bubbles and their diffusion channels. In our two-stage identification strategy, we first decompose the observed housing price into a fundamental and a bubble component. We then analyze the interdependence among these regional bubble series using spatial econometric methods. The empirical results indicate that a regional bubble first affects the adjacent regions via geographical proximity. Spillover effects reinforce the influence on adjacent regions. Similar economic and mortgage market conditions help spread the bubble across regions. We conclude that a regional housing bubble is of more than regional interest because it may infect numerous other regions and also cause nationwide problems through wealth and multiplier effects.

Keywords: Housing price bubble, co-movement, spillover effects, state-space modeling, dynamic space-time model

JEL Classification: C21, C23, R15