Long-run Equilibrium Shift and Short-run Dynamics of U.S. Home Price Tiers During the Housing Bubble

We use vector error correction models to examine the interdependence between the high and the low price tiers during the latest housing market boom and bust. For 118 of the 364 US statistical areas analyzed, the tiered price indexes are bound by a long-run relationship. In general, low tier homes appreciated more than high tier homes in the past two decades. In contrast to previous periods of high volatility, however, low tier homes appreciated more during the boom and lost more value during the bust of the market. We find a shift in the long-run equilibrium during the bubble —the cointegration parameter that ties the tiers together is greater in absolute value during the bubble period compared to the periods of more moderate appreciation and depreciation rates. Moreover, the shift in the long-run equilibrium can be explained by differences in subprime originations across housing markets. We also find that short run price dynamics is driven by momentum in both segments of the market.