Integration and Contagion in US Housing Markets

50 Pages Posted: 20 Oct 2011 Last revised: 16 Dec 2011

John Cotter

University College Dublin; Anderson School of Management

Stuart A. Gabriel

University of California, Los Angeles - Anderson School of Management

Richard Roll

California Institute of Technology

Multiple version iconThere are 3 versions of this paper

Date Written: October 18, 2011

Abstract

This paper explores integration and contagion among US metropolitan housing markets. The analysis applies Federal Housing Finance Agency (FHFA) house price repeat sales indexes from 384 metropolitan areas to estimate a multi-factor model of U.S. housing market integration. It then identifies statistical jumps in metropolitan house price returns as well as MSA contemporaneous and lagged jump correlations. Finally, the paper evaluates contagion in housing markets via parametric assessment of MSA house price spatial dynamics.

A R-squared measure reveals an upward trend in MSA housing market integration over the 2000s to approximately .83 in 2010. Among California MSAs, the trend was especially pronounced, as average integration increased from about .55 in 1997 to close to .95 in 2008! The 2000s bubble period similarly was characterized by elevated incidence of statistical jumps in housing returns. Again, jump incidence and MSA jump correlations were especially high in California. Analysis of contagion among California markets indicates that house price returns in San Francisco often led those of surrounding communities; in contrast, southern California MSA house price returns appeared to move largely in lock step.

The high levels of housing market integration evidenced in the analysis suggest limited investor opportunity to diversify away MSA-specific housing risk. Further, results suggest that macro and policy shocks propagate through a large number of MSA housing markets. Research findings are relevant to all market participants, including institutional investors in MBS as well as those who regulate housing, the housing GSEs, mortgage lenders, and related financial institutions.

Keywords: integration, correlation, contagion, house price returns

JEL Classification: G10, G11, G12, G14, R12, R21

Suggested Citation

Cotter, John and Gabriel, Stuart A. and Roll, Richard, Integration and Contagion in US Housing Markets (October 18, 2011). Available at SSRN: https://ssrn.com/abstract=1945975 or http://dx.doi.org/10.2139/ssrn.1945975

John Cotter (Contact Author)

Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

University College Dublin ( email )

School of Business, Carysfort Avenue
Blackrock, Co. Dublin
Ireland
353 1 716 8900 (Phone)
353 1 283 5482 (Fax)

HOME PAGE: http://www.ucd.ie/bankingfinance/staff/professorjohncotter/

Stuart A. Gabriel

University of California, Los Angeles - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
310-825-2922 (Phone)
310-206-5455 (Fax)

HOME PAGE: http://www.anderson.ucla.edu

Richard W. Roll

California Institute of Technology ( email )

1200 East California Blvd
Mail Code: 228-77
Pasadena, CA 91125
United States
626-395-3890 (Phone)
310-836-3532 (Fax)

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