The Economic Impact of Anticipated House Price Changes – Evidence from Home Sales

Abstract

If realized house prices have the wealth effect and the collateral effect on the economy, anticipated house price changes should have similar economic effects. This paper empirically analyzes the effects of single family home sales, which are shown to be able to predict house prices in the literature, on economic production, using 372 Metropolitan Statistic Areas in the U.S. from the first quarter of 1981 to the second quarter of 2008 in a panel Vector Error Correction Model. Changes in home sales are found to Granger cause the growth rate of per capita Gross Metropolitan Product, and the dynamic effects are visualized with impulse response functions. Supporting evidence for the economic impact of home sales is also found in contemporaneous regressions.

Keywords: home sales, wealth effect, collateral effect, housing market, vector error correction model, multifactor error structure, panel data