The Effects of Business and Financial Conditions on Herding Behavior and Bubbles in U.S. Housing Markets

This study investigates herding behavior in the U.S. housing market from 1975 to 2023. The results show that the degree of herding varies across time, market regimes, and regions. Herding behavior appears with greater intensity in the post-2013 period and in the two years following the 2000 technology bubble and the 2008 subprime mortgage crisis in West North Central, West South Central, East North Central, and New England regions. We find clear evidence of regime-dependent herding during periods of extreme housing market turbulence, down markets, weak economic conditions, and low transaction volume. Declining house prices and tightened financial conditions are associated with stronger reductions in housing return dispersion in almost all regions. Regional housing markets in the West North Central and West South Central divisions are particularly responsive to adverse shocks and display a high propensity to herd, whereas the Mid-Atlantic region appears to be the most efficient, with no evidence of herding in any environment. Finally, we document that herding behavior in several regions provides predictive information about future housing bubble formations at both the regional and national levels and exerts a destabilizing effect on the overall U.S. housing and stock markets.