House Price Growth Synchronization and Business Cycle Alignment

Abstract

Using four decades of data, we provide novel evidence that the increasing interstate synchronization of house price growth leads to higher business cycle alignment across U.S. states. The relation is stronger between states with similar banking development and in non-tradable sectors, and is channeled through both the collateral and direct wealth effects. Results also hold at the MSA level and are robust to various endogeneity controls, including a Bartik-type instrument. Overall, our findings suggest that the housing market integration across regions can lead to amplified business cycles associated with an increased systemic economic risk at the country level.

Keywords: House price growth synchronization; Business cycle alignment; Housing collateral; Consumption growth; Banking integration and development

JEL Classification: G21; E32; O47; R30; R11