Understanding House Price Volatility: Measuring and Explaining the Supply Side of Metropolitan Area Housing Markets

Illinois State University Department of Economics Working Paper

53 Pages Posted: 4 Apr 2003

Date Written: 2002

Abstract

The speed with which its house prices respond to real economic shocks is critical to the functioning of an economic market. This speed is determined relative to the magnitudes of house price changes on the off-equilibrium path, as the market adjusts. When such changes are caused by an unexpected shift in housing demand, which is a substantial component of the variation in house prices, the magnitudes are determined by the elasticity of housing supply. I examine local housing-supply dynamics in each of 47 U.S. metropolitan-area housing markets using a unique market-level panel dataset. The data are analyzed with a conditional vector-autoregression, which characterizes the dynamic responses of housing price and stock to an increase in housing demand caused by a shift in employment. These response time-paths are used to create measures of short-, medium-, and long-run supply elasticities. Both the time-paths and the implied elasticities vary widely. I use several area characteristics to explain the variation in the supply elasticity measures across metropolitan areas. The results suggest that an area's population, land area, historical growth rate, region, January temperature, age of housing stock and incentive to regulate housing are all important determinants of a market's house-price response.

Keywords: housing supply, house price elasticity, housing market adjustment, house price response

JEL Classification: R31

Suggested Citation

Evenson, Bengte L., Understanding House Price Volatility: Measuring and Explaining the Supply Side of Metropolitan Area Housing Markets (2002). Illinois State University Department of Economics Working Paper, Available at SSRN: https://ssrn.com/abstract=352400 or http://dx.doi.org/10.2139/ssrn.352400

Bengte L. Evenson (Contact Author)

affiliation not provided to SSRN

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