A hierarchical factor analysis of U.S. housing market dynamics



Summary  This paper studies the linkages between housing and consumption in the United States taking into account regional variation. We estimate national and regional housing factors from a comprehensive set of U.S. price and quantity data available at mixed frequencies and over different time spans. Our housing factors pick up the common components in the data and are less affected by the idiosyncratic noise in individual series. This allows us to get more reliable estimates of the consumption effects of housing market shocks. We find that shocks at the national level have large cumulative effects on retail sales in all regions. Though the effects of regional shocks are smaller, they are also significant. We analyse the driving forces of housing market activity by means of factor-augmented vector autoregressions. Our results show that lowering mortgage rates has a larger effect than a similar reduction of the federal funds rate. Moreover, lower consumer confidence and stock prices can slow the recovery in the housing market.