Time-varying impact of uncertainty shocks on the US housing market

Abstract

This paper investigates the impact of uncertainty shocks on the housing market of the United States using the time-varying parameter factor augmented vector autoregression (TVP-FAVAR). We use a comprehensive quarterly time-series dataset on real economic activity, price, and financial variables, besides housing market variables, covering the period 1963:Q1 to 2014:Q3. In addition to housing prices, we also consider variables related to home sales, permits and starts. In general, the results of the cumulative response of housing variables to a one standard deviation positive uncertainty shock at the one-, four-, eight-, and twelve-quarter-horizon tends to change over time, both in terms of sign and magnitude, with the uncertainty shock primarily negatively affecting the housing variables, in particular prices, permits and starts, in longer-runs (i.e., two- and three-years-ahead horizons).