Cardiff University, Cardiff Business School, Cardiff
We use a time-varying parameter dynamic factor model with stochastic volatility (DFM-TV-SV) estimated using Bayesian methods to disentangle the relative importance of the common component in FHFA house price movements from state-specific shocks, over the quarterly period of 1975Q2 to 2017Q4. We find that the contribution of the national factor in explaining fluctuations in house prices is not only critical, but also has been increasing and has become more important than the local factors since around 1990. We then use a Bayesian change-point vector autoregressive (VAR) model, that allows for different regimes throughout the sample period, to study the impact of aggregate supply, aggregate demand, (conventional) monetary policy, and term-spread shocks, identified based on sign-restrictions, on the national component of house price movements. We detect three regimes corresponding to the periods of "Great Inflation", "Great Moderation", and the zero lower bound (ZLB). While the conventional monetary policy is found to have played an important role in the historical evolution of the national factor in the first-regime, other shocks are found to be quite dominant as well especially during the second-regime, with monetary policy shocks playing virtually no role during this period. In the third-regime, unconventional monetary policy shock is found to have led to a (delayed) recovery in the housing market. But more importantly, we find evidence that the national housing factor has been detached from the identified macroeconomic shocks (fundamentals) since 2014, thus suggesting that a "national bubble" might be brewing again in the US housing market. Understandably, our results have important policy implications.
House Prices Time-Varying Dynamic Factor Model Change-Point Vector Autoregressive Model Macroeconomic Shocks Bayesian Analysis