Cross-Regional Connectedness in the United States’ Housing Market

Statistics Department, Graduate School of Arts and Sciences, Columbia University, New York, USA

Abstract

The interconnectedness of markets is a useful measure of risk and therefore an indicator of economic stability. In this paper, the interconnectedness among housing markets in different metropolitan areas was analyzed. Interconnectedness between the housing market and other markets were also calculated. In regional studies, West Coast housing markets were found to be the most influential on housing markets elsewhere. Interestingly, overall connectedness across regions steadily increased prior to the subprime mortgage crisis, representing a systematic risk increase. When analyzing diverse markets in relation to the housing market, the stock market was found to have the highest interconnectedness, suggesting that financial health of stock market depend on financial health of housing market. The increased systematic risk due to high housing market interconnectedness coupled with the interdependence between the stock market and the housing market were key indicators of the subprime mortgage crisis. Such measures should be monitored in the future to avoid a similar economic disaster.