Long-run Equilibrium and Short-Run Adjustment in U.S. Housing Markets

Abstract

This paper examines the long-run equilibrium between real house prices and macroeconomic fundamentals in U.S. housing markets, as well as the short-run adjustment of real house prices back to the equilibrium. Pooled mean-group and mean-group estimation techniques developed by Pesaran and Smith (1995) and Pesaran et al. (1999) are applied to a panel of the 51 U.S. states over the period of 1976Q3 to 2012Q4. Our results suggest a common long-run relationship over the sample period between real house prices and their economic fundamental determinants in the 51 U.S. states. However, the speed of adjustment of real house prices varies vastly across states, with a half-life estimate of 22 quarters on average, and the deviations of real house prices from the equilibrium range from –30% to 46% across states over time.