To what extent did lower Fed rates cause the recent US housing boom? Marco Del Negro and Christopher Otrok at the Atlanta Fed have looked at this question, and their answer is: not much.
In Monetary Policy and the House Price Boom across U.S. States (Working Paper 2005-24) the authors used a dynamic factor model estimated via Bayesian methods to disentangle the relative importance of the common component in the Office of Federal Housing Enterprise Oversight’s house price movements from state- or region-specific shocks, estimated on quarterly state-level data from 1986 to 2004. Their key findings:
The authors find that movements in house prices historically have mainly been driven by the local (state- or region-specific) component. The recent period (2001–04) has been different, however: “Local bubbles” have been important in some states, but overall the increase in house prices is a national phenomenon.
The authors then use a VAR to investigate the extent to which expansionary monetary policy is responsible for the common component in house price movements. The authors find the impact of policy shocks on house prices to be very small.
This paper captures a number of the key drivers. However it is missing one key component - the shift in asset allocation that occurred after the 2001 stock market crash. That surely had greater effect than the did Fed cuts to interest rates. The end of one asset boom contributed to the next.
A recent OECD study, meanwhile, concluded there was No housing bubble in the US - at least at a national level.
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