A Spatio-Temporal Model of House Prices in the Us

31 Pages Posted: 15 Oct 2006

See all articles by Sean Holly

Sean Holly

University of Cambridge - Department of Applied Economics

M. Hashem Pesaran

University of Southern California - Department of Economics

Takashi Yamagata

University of Cambridge - Faculty of Economics and Politics

Date Written: September 2006

Abstract

The purpose of this paper is to apply recent advances in the econometrics of panel data to a problem that has a clear spatial dimension. We model the dynamic adjustment of real house prices using data at the level of US States. In the last decade, in most OECD countries there has been a significant rise in real house prices. This attracted the attention of many international organisations and central banks. In this paper we consider interactions between housing markets by examining the extent to which real house prices at the State level are driven by fundamentals such as real income, as well as by common shocks, and determine the speed of adjustment of house prices to macroeconomic and local disturbances. We take explicit account of both cross sectional dependence and heterogeneity. This allows us to find a cointegrating relationship between house prices and incomes and to identify a small role for real interest rates. Using this model we then examine the role of spatial factors, in particular the effect of contiguous states by use of a weighting matrix. We are able to identify a significant spatial effect, even after controlling for State specific real incomes, and allowing for a number of unobserved common factors.

Keywords: house price, cross sectional dependence, spatial dependence

JEL Classification: C21, C23

Suggested Citation

Holly, Sean and Pesaran, M. Hashem and Yamagata, Takashi, A Spatio-Temporal Model of House Prices in the Us (September 2006). IZA Discussion Paper No. 2338, CESifo Working Paper Series No. 1826, IEPR Working Paper No. 07.16, Available at SSRN: https://ssrn.com/abstract=937377 or http://dx.doi.org/10.2139/ssrn.937377

Sean Holly (Contact Author)

University of Cambridge - Department of Applied Economics ( email )

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Cambridge, CB3 9DE
United Kingdom
+44-1223-335251 (Phone)

M. Hashem Pesaran

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
United States

Takashi Yamagata

University of Cambridge - Faculty of Economics and Politics ( email )

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Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

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