The impact of interest rates, income, and employment upon regional housing prices

Abstract

The objective of this article is to identify important differences in the way new housing prices react to local and national economic factors. The study finds that regional housing prices react uniformly to certain national economic factors, such as mortgage rates. On the other hand, local factors such as population shifts, employment, and income trends often have a unique impact on housing prices. The study rejects the hypothesis of a single national housing market in favor of one that allows for broad national trends to be superimposed upon unique regional markets.The cyclical nature of the U.S. housing market has been well documen*ed in the academic literature. The focus of most of the previous work has ccntcred on either national housmg market macroeconomic relationships or microeconomic housing conditions for specific urban areas. The focus of this article is unique in that it analyzes the determinants of new housing prices at the regional level using a combination of macroeconomic and microstructural factors. Others have also recognized the need for a regional perspective. For example, McAvinchey and Maclennan (1982) postulate that housing inflation rates may differ across regions due to: (1) variations in preferences for housing relative to other goods, (2) significant differences and spatial rigidity in the structure of demand and supply which may inhibit equilibrating flows of households and construction inputs, and (3) national economic conditions which may not diffuse equally or impact all regions simultaneously (p. 44). Thus, in addition to identifying the specific factors that influence housing prices, this study analyzes the geographic structure of housing markets across the United States.Comparisons are made among nine census regions using a reduced form housing price function of the type employed by Manchester (1987) and Singell and Lillydahl (1990). The study finds that while various regions respond in a similar fashion to certain national factors, such as mortgage rates; local economic and demographic factors, such as population, employment, and income, have unique effects across different regions. In terms of geographic market structure, the results suggest that policy makers and housing researchers should consider at least four broad geographic regions (Northeast, North Central, South, and West) when formulating housing policy.

How Well Do Individuals Predict the Selling Prices of Their Homes?

“…The correlation between interest rates, borrowing costs, and housing prices is well documented (Harris 1989;Reichert 1990;Poterba 1991;Englund and Ioannides 1997;Sutton 2002;and Tsatsaronis and Zhu 2004) 22 and, while its correlation with home sales has been much less discussed, there is a long tradition in economics that supports the predictive power of interest rate measures with respect to the evolution of the economy (Sims 1980;Stock and Watson 1989). For example, Bernanke (1990) shows how the interest rate measure we have used here, the Federal Funds Rate, is a good predictor of a large number of indicators of the real economy.…”

Granger Causality Among House Price and Macroeconomic Variables in Victoria

“…Baffoe-Bonnie (1998) pointed out that the housing market could be "shocked sensitively" by the change of employment and mortgage rates at both national and regional level. Reichert (1990) found that regional house prices reacted to some national economic factors, such as the mortgage rate. Johnes and Hyclak (1999) described how house prices have a great effect on labour force size.…”

Household Debt and Housing Price: An Empirical Study across 36 Countries

“…Reichert (1990) studies the influence of local and national economic factors and found that people's income trends, demographic change and employment status are major factors affecting housing prices. Lamont and Steinit (1997) analyzes the relationship between income and housing price using city-level data.…”