Further Evidence on the (In-) Efficiency of the U.S. Housing Market

Research in real estate finance and economics has been dealing with the topic of efficiency in the U.S. housing market for over 25 years. However, most recent research either examines local markets based on single homes or focuses on the Conventional Mortgage Home Price Indices (CMPHI) and Federal Housing Finance Agency (FHFA) indices. To our knowledge, however, there does not yet exist any study based on the Case-Shiller indices. This is surprisingly given that the Case-Shiller indices have several advantages over the CMPHI and FHFA indices, particularly since they serve as the underlying of derivatives traded at the Chicago Mercantile Exchange. This study examines the behavior of monthly house price changes for 20 cities in the U.S. and two nationwide indices from January 1987 to June 2009 incorporating both the longlasting boom and the steep and strong downturn of the U.S. housing market. The conducted analysis gives empirical evidence that house price changes in the U.S. exhibit certain patterns. The results show that the return generating process of U.S. housing markets differs significantly from the theoretical model of the random walk hypothesis. Without any exception, the conducted tests reject the null hypothesis of a random walk for all time series of house price changes. Furthermore, trading strategies are implemented as a robustness check and support the findings by generating excess returns in comparison to a buy-and-hold strategy. In general, we can conclude that investors might be likely to earn excess returns by using past information in the U.S. housing market, in particular when standardized derivatives of the indices are traded on exchange markets. However, due to data limitations, the analysis does not conduct the tests based on prices and price changes in derivatives. This analysis would give further empirical evidence whether inefficiencies in the U.S. housing market are exploitable or whether they are incorporated into the pricing process of tradable products and are thus not exploitable by investors.

Schindler, Felix (2010), Further Evidence on the (In-) Efficiency of the U.S. Housing Market, ZEW Discussion Paper No. 10-004, Mannheim.