The effects of real Estate uncertainty shocks on state-level economic dynamics

Abstract

In this paper, we analyze how uncertainty shocks in the real estate market affect the economy of different US states. Firstly, we construct a measure of real estate uncertainty for each state. Using this measure, we estimate a Bayesian Panel Vector Autoregressive model to obtain impulse response functions to real estate uncertainty shocks. We then examine which state characteristics can explain the variations in economic activity responses to such shocks. Our results show that real estate uncertainty shocks have adverse effects on economic activity, with varying intensities across states. We also show that the adverse impacts on income are larger in states with a high share of financial, construction, and manufacturing industries, as well as a large proportion of small banks. On the other hand, states that allocate more resources to welfare policies experience lower impacts.