Vulnerabilities to housing bubbles: Evidence from linkages between housing prices and income fundamentals

This paper investigates US state‐level housing markets by examining three signs of vulnerabilities to housing bubbles: negative or insignificant co‐movements between housing prices and income fundamentals, high housing‐price persistence, and boom–bust regime‐switching phenomena. The study effectively mitigates potential estimation bias by estimating income growth using three explanatory variables for housing markets: the stock price, the federal funds, rate and non‐farm‐employment growth. The moving‐average thresholds track housing boom–bust regime shifts from a forward‐looking perspective. Although only California displays high housing‐bubble vulnerability in all dimensions analysed, all selected states show signs of housing‐bubble vulnerabilities because income fundamentals lack explanatory power for housing price dynamics. The results suggest that the US government had difficulties in stabilizing the housing market during the period 1976–2010.