House price responses to monetary policy surprises: evidence from US listings data

Summary

Focus

Housing plays a significant role in the economy. It represents a large fraction of household wealth, and fluctuations in its price can impact the decisions of households to consume or save. Fluctuations in housing stock through construction are also an important driver of economic growth. To achieve their goal of price stability, central banks need to know how fast their interest rate policy decisions transmit to outcomes in the housing market and how strong this transmission channel is.

Contribution

We study how house prices react to changes in monetary policy in the United States, using data on home listings and sales from 2001 to 2019. We focus on unexpected changes in interest rates and use local projections to estimate how list prices change in the weeks after a surprise rate hike. We construct weekly house price indices by zip code using regressions that control for various housing characteristics to isolate price movements over time. We explore four factors that may contribute to the strength and speed of transmission of monetary policy to home prices: household income, house value levels, density of local bank branches, and elasticity of housing supply.

Findings

We find that house prices react much faster to changes in interest rates than previously thought. List prices decrease within weeks of an interest rate hike. List prices update faster than sale prices, which often reflect sales of homes listed long before a policy change. House prices are more sensitive to changes in long-term interest rates than to changes in short-term rates, and their response tends to last for about a year after the monetary policy surprise. We also show that the rapid response in house prices is related to the fast reaction in mortgage rates to changes in monetary policy.

Abstract

Evidence on the contemporaneous effects of interest rates on house prices has been elusive. We present direct evidence of the high-frequency causal relationship between interest rates and house prices in the United States. We exploit information contained in listings for residential properties for sale in the United States between 2001 and 2019 from the CoreLogic Multiple Listing Service Dataset. Using high-frequency instruments for monetary policy shocks, we estimate that a contractionary monetary policy surprise that raises average 30-year mortgage rates by 0.25 percentage points lowers housing list prices by 1 percent within two weeks. House prices respond to surprises to the expected path of future rates and are insensitive to the federal funds rate surprises. The initial response of list prices is almost entirely passed through to sale prices and persists for at least a year after the announcement.

JEL Classification: E52, R21, R31

Keywords: House prices, monetary policy, transmission of monetary policy, list and sales prices