The Economic Drivers of Differences in House Price Inflation Rate Across MSAs
47 Pages Posted: 19 Jan 2016 Last revised: 22 Mar 2016
Date Written: March 01, 2016
This study examines why monetary policy at the national level can have vastly different effects on appreciation rates of single family houses across metropolitan statistical areas (MSAs). The study employs Case/Shiller monthly house price index data for 19 MSAs from 1992:06 to 2014:12 and FHFA quarterly house price index data for 94 MSAs from 1992:3 to 2014:4. We model the importance of MSA-specific demand and supply characteristics through a set of interaction terms between these factors and monetary policy. The empirical analysis is cast in terms of a state-space approach with a stochastic trend component to absorb the Impact of omitted variables. Robustness checks use panel data estimators with interaction terms. A lower federal funds rate is associated with home price run-ups in MSAs that are characterized by higher demand and tighter supply conditions.
Keywords: house price inflation, demand and supply factors, federal funds rate, monetary policy
JEL Classification: C21, C23, E50, R10
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