The Co-Movement of Housing Sales and Housing Prices : Empirics and Theory

This paper examines the strong positive correlation that exists between the volume of housing sales and housing prices. We first examine gross housing flows in the US and divide sales into two categories: transactions that involve a change or choice of tenure, as opposed to owner-to-owner churn. The literature suggests that the latter generates a positive sales-to-price relationship, but we find that the former actually represents the majority of transactions. We develop a simple model of these inter-tenure flows which suggests they generate a negative price-to-sales relationship. This runs contrary to a different literature on liquidity constraints and loss aversion. Empirically, we assemble two data bases to test the model: a short panel of 33 MSA covering 1999-2008 and a long panel of 101 MSA spanning 1982-2006. Our results from both are strong and robust. Higher sales ldquo;Granger causerdquo; higher prices, but higher prices ldquo;Granger causerdquo; both lower sales and a growing inventory of units-for-sale. These relationships together provide a more complete picture of the housing market ndash; suggesting the strong positive correlation in the data results from frequent shifts in the negative price-to-sales schedule