What factors drive house prices in the USA Sign restricted VAR approach

Abstract

This study explores house price fluctuations in the USA and shed light on which factor is the main contributor driving house prices. In order to decompose the changes in house prices, structural vector autoregression with sign restrictions for the US housing market is applied. In addition to including housing market-based fundamental variables such as the number of housing permits, housing rent prices, house prices, a measure of credit conditions, and the housing sentiment index are also included to distinguish four different shocks, namely housing supply shocks, shocks to the housing service demand, credit shocks, and speculative demand shocks. Empirical findings show that the main contributors to house price fluctuations are credit shocks and housing supply shocks in the long-run. In addition, while housing supply and credit conditions are the most important contributors during the boom, the contributions of credit conditions and speculative demand become larger after the boom. In fact, credit conditions are the largest contributor during the post-boom period.