Vulnerabilities to housing bubbles: Evidence from linkages between housing prices and income fundamentals

This paper investigates US state-level housing markets by examining three signs of vulnerabilities to housing bubbles: negative or insignificant co-movements between housing prices and income fundamentals, high housing-price persistence, and boom-bust regime-switching phenomena. The study effectively mitigates potential estimation bias by estimating income growth using three explanatory variables for housing markets: the stock price, the federal funds rate, and non-farm-employment growth. The moving-average thresholds track housing boom-bust regime shifts from a forward-looking perspective. Although only California displays high housing-bubble vulnerability in all dimensions analysed, all selected states show signs of housing-bubble vulnerabilities because income fundamentals lack explanatory power for housing price dynamics. The results suggest that the US government had difficulties in stabilizing the housing market during the period 1976-2010.