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Paper eres2010_069:
AN INTRINSICALLY STABLE SYSTEM? SUPPLY, DEMAND AND FINANCING IN HOUSING MARKETS THE US PERSPECTIVE

id eres2010_069
authors Xiao, Qin
year 2010
title AN INTRINSICALLY STABLE SYSTEM? SUPPLY, DEMAND AND FINANCING IN HOUSING MARKETS THE US PERSPECTIVE
source 17th Annual European Real Estate Society Conference in Milan, Italy
summary The central question of investigation in this study is the stability of housing markets and their related sectors. A feature of the theoretical framework established in this study is that it accounts for heterogeneity among economic agents, as well as slow information diffusion, as in Hong and Stein (Harrison Hong and Jeremy C Stein, 1999). This theory is then incarnated econometrically in ARMAX form. The empirical investigation uses a panel of data from the four regions of the United States: Northeast, Midwest, South and West. The researcher's initial interests in housing markets were triggered by the spectacular rise and fall of housing prices in the major economies around the world. After years of attempting to model housing prices using different frameworks and methods, and using data from various countries/regions, a natural curiosity arises: is the system linking the housing markets, the financial institutions, and other parts of an economy an intrinsically stable one? To elaborate on that, does equilibrium or equilibria exist in this system? If they do, are they stable; are they attainable? If attainable, what sort of time path would each variable of interests in this system take? Economists in general classify housing markets into two sub-markets: the space and the capital markets, which are also referred to respectively as the real sector and the financial sector. The space market is location-specific hence heavily influenced by local social economic factors; but the capital market is global. Because funds move around the world in chases of higher returns, the space market is strongly affected by the weather conditions in global financial markets. Conversely, because housing is a major household asset, the performance of this sector will have important bearings on the healthiness, or lack or it, of financial institutions, close and afar. One of the aims of this study is to build up a theoretical framework which explicitly models the connections between the real and the financial sides of housing markets. The traditional approaches to housing markets tend to treat the two separately. For instance, the four-quadrant model did a great job in integrating the three sub-markets of the space market, namely, the user, the capital and the development markets. Nowhere in this model, however, accounts for the important influences of mortgage financing on the real activities of housing markets. Buckley was one of the very few authors who have attempted this task (Robert M. Buckley, 1982). His work is to be greatly improved by incorporating the advancements in financial and the econometric literatures, seen in the past thirty years, a bold step the current researcher is contemplating. Another aim of this study is to build up, empirically using panel data, a simultaneous equations model. Most empirical studies take a single equation approach when modeling housing markets. Such an approach allows us to take a microscopic view, hence generating in-depth knowledge, of the problems at hand. It does not, however, facilitate our understanding of the interdependences and interactions among the different parts of a closely linked system. Without a holistic perspective, theoretically and empirically, our understanding will be incomplete regarding many of the issues which have attracted the limelight now and then, for instance, the cyclical behavior of the housing markets, and its somewhat destructive impact on national and global economies. More specifically, the researcher will attempt to build up a system of four equations, in ARMAX form, that simultaneously determines the housing rent and price, the supply of housing units and housing finance. An ARMAX model combines the desirable properties of polynomial and geometric lag models, permitting very flexible lag structures with relatively few parameters. There is also no need to impose restrictive assumptions about the structures of the disturbance terms, which is the case in classical OLS. Once constructed, estimated, and tested for robustness, the model will be analyzed, theoretically and empirically, to establish the dynamic stability of the system. With these results in hand, the researcher is then in a position to deal with the short-run and long-run impact of housing policies and mortgage market regulations, an endeavor which in no sense assumes a secondary place in this study. The readers are cautioned, however, whatever empirical statements that might arrive on completion of this study are results of a small sample exercise { the effective data used for estimation include less than 10-year's monthly observations. Such results may well be valid only for the period and the regions under consideration. More firm conclusions can only be reached when longer time series are available; and a general empirical statement cannot be made without an extended study employing data from a variety of countries and regions.
keywords Heterogeneous agents, slow information diffusion, panel studies, ARMAX, impact, dynamic and cumulative multipliers, impulse response functions, existence of equilibrium, system stability, policy implications
series ERES:conference
email q.xiao@abdn.ac.uk
more http://www.eres2010.org/index.asp?page=papers_download
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session Housing Economics (5)
last changed 2010/08/04 20:47
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