Shock Waves: Mapping the Impact of Uncertainty on U.S. Urban Housing Markets

Abstract This research yields a new measure of uncertainty, and investigates how macroeconomic uncertainty shocks influence major Metropolitan Statistical Area (MSA)-level housing markets in the US. Utilizing an extended factor augmented vector autoregression (FAVAR) model, this study spotlights different impacts of aggregate uncertainty shocks on housing markets across MSAs while controlling for effects of MSA-specific uncertainty shocks. The results indicate that the 3-month risk-free interest rate, consumer sentiments, REIT total returns, and the oil market respond to uncertainty shocks considerably. There are marked differences in responses of metropolitan housing price returns to uncertainty shocks in terms of persistence and magnitude. MSAs with high ratios of house value over household income are likely to experience greater housing price appreciation as they are hit by uncertainty shocks, and uncertainty shocks reduce housing price returns to a larger degree in MSAs whose housing price dynamics are more volatile in the housing boom 2002-6. The empirical results are helpful in policy-making for stabilizing local housing markets owing to differences in monetary-policy effectiveness across cities, and shed light on geographic diversification mechanism.