Drilling Down: The Impact of Oil Price Shocks on Housing Prices

38 Pages Posted: 6 Nov 2019

See all articles by Valerie Grossman

Valerie Grossman

Federal Reserve Banks - Federal Reserve Bank of Dallas

Enrique Martínez-García

Federal Reserve Bank of Dallas - Research Department

Luis Bernardo Torres

Texas A&M University

Yongzhi Sun

Southwestern University of Finance and Economics (SWUFE)

Multiple version iconThere are 2 versions of this paper

Date Written: October 26, 2019

Abstract

This paper investigates the impact of oil price shocks on house prices in the largest urban centers in Texas. We model their dynamic relationship taking into account demand- and supply-side housing fundamentals (personal disposable income per capita, long-term interest rates, and rural land prices) as well as their varying dependence on oil activity. We show the following: 1) Oil price shocks have limited pass-through to house prices — the highest pass-through is found among the most oil-dependent cities where, after 20 quarters, the cumulative response of house prices is 21 percent of the cumulative effect on oil prices. Still, among less oil-dependent urban areas, the house price response to a one standard deviation oil price shock is economically significant and comparable in magnitude to the response to a one standard deviation income shock. 2) Omitting oil prices when looking at housing markets in oil-producing areas biases empirical inferences by substantially overestimating the effect of income shocks on house prices. 3) The empirical relationship linking oil price fluctuations to house prices has remained largely stable over time, in spite of the significant changes in Texas’ oil sector with the onset of the shale revolution in the 2000s.

Keywords: real house prices, real rural land prices, panel VAR model with exogenous variables, real oil price shocks, (non-oil) real income shocks

JEL Classification: C33, O18, Q43, R14, R3.

Suggested Citation

Grossman, Valerie and Martinez-Garcia, Enrique and Torres, Luis Bernardo and Sun, Yongzhi, Drilling Down: The Impact of Oil Price Shocks on Housing Prices (October 26, 2019). Available at SSRN: https://ssrn.com/abstract=3476053 or http://dx.doi.org/10.2139/ssrn.3476053

Valerie Grossman

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Enrique Martinez-Garcia (Contact Author)

Federal Reserve Bank of Dallas - Research Department ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States
214-922-5262 (Phone)

HOME PAGE: http://sites.google.com/view/emgeconomics

Luis Bernardo Torres

Texas A&M University ( email )

Langford Building A
798 Ross St.
College Station, TX 77843-3137
United States

Yongzhi Sun

Southwestern University of Finance and Economics (SWUFE) ( email )

55 Guanghuacun St,
Chengdu, Sichuan 610074
China

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