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Analyzing the Housing Market’s Uneven Boom and Bust Cycles

When discussing home prices and the market's boom and bust cycles, analysts say it is important to recognize that such things look very different depending on the region. Why do national trends in house prices spread more to some cities than to others? How do shocks to local economies spread between cities? And why did some cities experience high house price growth
during the 2000s and 2010s even in the absence of large local economic shocks?

A paper by Gregor Schubert [1], a Harvard Business School Ph.D. candidate and Joint Center for Housing Studies (JCHS) fellow, sets out to provide answers to conundrums that have baffled researchers, he says, as he explores the migration-related ripple effects of local economic disruptions.

In general, national boom and bust cycles seem to occur in some areas of the country more than in others. One way to measure this is by the degree to which local house prices change, on average, with a one percent change in average national growth—the so-called "beta" of local housing markets. (Schubert)

"I argue that the systematic differences in the degree to which geographic housing markets are affected by common economic shocks can be explained by patterns of migration between U.S. metros," he said.

For example, he says, "When an economic boom starts in one region and benefits a particular group of workers, it often ends up driving up local house prices. This increase in housing costs then causes other workers to leave that region in pursuit of more affordable housing elsewhere. As a result, the increase in population in those destinations drives up housing demand and house prices, even though the region itself did not experience the fundamental shocks that caused the initial boom."

Secondly, in his paper, Schubert attempts to "connect the different pieces of the causal chain that connects an initial shock in one place to a household's decision to move and eventually leads to house price changes in destination areas that have different abilities to accommodate additional housing demand," he said.

"Putting these pieces together simulates what an alternative world would look like where, for instance, workers are stuck in place, unable to move to cheaper housing elsewhere," he said. 

Schubert says he used these simulations to compare the patterns of house price growth that would have occurred in response to historical wage shocks if workers were more or less mobile.

He says he found that when workers find it easier to move, it provides an "escape valve" for concentrated economic shocks.

"As workers move from booming areas to other regions, they carry some of the initial pressure on housing markets with them," he noted in an intro to his paper on JCHS.Harvard.edu [2]. "Consequently, a large localized shock ends up having a more moderate effect, but in multiple metros. This means that house price dynamics become more similar among U.S. metros, and pockets of extremely large house price growth become less likely."

The full research paper is available on JCHS.Harvard.edu [1].