Policy Uncertainty and House Prices in the United States

Abstract

Executive Summary. Previous research has either relied on a time series model or a panel model to establish cointegration between house prices and their main determinants, such as a measure of household income and a measure of interest rates. The findings are mixed but mostly lean toward rejecting cointegration between house prices and economic fundamentals. None of the studies included a measure policy uncertainty in their models. We include a measure of policy uncertainty in our model and use the bounds testing approach for cointegration and error-correction modeling. We find that policy uncertainty has short-run and mostly negative effects on house prices in 24 states. The short-run effects last into the long run in 17 states. Furthermore, cointegration is established in 35 states.