Housing Market and the Transmission of Monetary Policy: Evidence from U.S. States

What are the effects of monetary policy on the housing market? Is the response of the housing market similar across different states? We explore the impact of monetary policy shocks on real house prices and housing investment, using US state-level data. To this end we estimate VAR models for the period 1988-2009, to assess the differential effect - if any - of a common monetary policy shock on house prices and investment. Our VAR models also allow us to explore the macroeconomic effect of wealth shocks that originate in the housing market (housing prices). Our empirical models include key macroeconomic variables, namely personal income, prices and the federal funds rate, as well as housing market variables, e.g. real house prices, given by the FHFA house price index, and housing investment, proxied by the number of housing starts. Our baseline estimates suggest that transmission of monetary policy is heterogeneous across US states. Moreover, our VAR models indicate the presence of a wealth effect across most US states, as a positive housing price innovation leads to a strong, negative response of personal income.