Regional Convergence and Structural Change in US Housing Markets

If house prices are convergent at the national level, monetary policy is easier to implement and labor has an easier time achieving mobility across regions. There have accordingly been a number of studies on home price convergence. Some of these previous papers have methodological problems. In this paper we examine home price convergence across the different regions of the US using Pesaran's pairwise approach. This method obviates some of the methodological issues which have plagued previous studies. We also test with a method that allows for structural breaks in the relationships between regional markets. We find, first, that overall the US housing market is not convergent across regions. We find some evidence that the high-priced regions of New England and the Pacific exhibit convergence. Analysis of structural change reveals that some of the increase in co-movement between these expensive markets, and the decrease in co-movement between these and other markets accelerated in the early-to-mid 1980s. Other papers on income convergence have shown the 1980s to be a time when convergence in output in the US began to slow. Moreover, the early 1980s were a period of major change in US housing finance, as securitization made credit available from new sources, rather than just depository institutions. This greater credit, including from global sources, appears to have played a role in creating divergent prices in regions which likely have differing elasticities of housing supply