The Crisis Aftermath: Understanding Variability in Housing Recovery at the Metropolitan Level

Abstract

This paper examines the differences in magnitude of housing price recovery across metropolitan statistical areas (MSAs) in the United States following the financial crisis of 2007 – 2009. By characterizing the timing of the housing downturn and subsequent recovery two different ways, this thesis hypothesizes that the variability in housing recovery can be best explained by local housing fundamentals. Empirical tests of this hypothesis yield four important findings. First, several local measures of housing supply and demand are significant in being able to explain a considerable 71 percent of the variation in price appreciation observed across MSAs. Second, some degree of this housing price variability can also be attributed to cyclicality undergone in local markets, as measured by the magnitude and duration of price decline experienced by a particular MSA prior to its recovery. Third, geographic diversification across U.S. regions, without regard to more local housing fundamentals, is insufficient to explain a significant amount of variability in home prices. Fourth, the cycle under study (including the downturn throughout the 2007 – 2009 crisis and the start of the subsequent recovery) should be characterized as heterogeneous at the local MSA level, rather than being defined broadly as a national housing cycle with uniform timing and magnitude across all markets.