Price-volume Correlation in the Housing Market: Causality and Co-movements (P.25)

We also find that trading volume Granger causes prices, but only in markets with
low supply elasticity. Our results also provide insights regarding heterogeneity
across markets. In tight markets (low supply elasticity), house prices are less
sensitive to mortgage rates and average household income, but more sensitive to
growth in employment.
We find a significant and positive price–volume correlation at quarterly
frequency. Our model captures the price–volume correlation well: after controlling
for the price–volume correlation explained by our model, there is no significant
price–volume correlation left. Furthermore, we find that the Granger causality of
prices on trading volume appears to lead to a negative price–volume correlation,
while the Granger causality of trading volume on prices leads to a positive price–
volume correlation in markets with high supply elasticity, but a negative price–
volume correlation in markets with low supply elasticity. Therefore, the Granger
causality between prices and trading volume does not help explain the price–volume
correlation well, while the co-movements of prices and volume, which are caused by
shocks in exogenous variables, are significant, substantial, and positive for all
markets. Using impulse response functions, we find that trading volume reacts more
dramatically to economic shocks than home prices do. We also observe overshooting
of trading volume in the adjustment process to shocks.
Acknowledgements We thank Michael LaCour-Little, participants of 2005 AREUEA mid-year
conference, seminar participants at Colorado University at Boulder, and two anonymous referees for
insightful comments. All errors are ours.
Appendix: The list of the 114 MSAs in our analysis
Table 7 The list of the 114 MSAs in our analysis
MSAs
Abilene TX MSA Albuquerque NM MSA
Alexandria LA MSA Albany GA MSA
Amarillo TX MSA Anchorage AK MSA
Asheville NC MSA Athens GA MSA
Atlanta GA MSA Bakersfield CA MSA
Baton Rouge LA MSA Bellingham WA MSA
Benton Harbor MI MSA Billings MT MSA
Binghamton NY MSA Birmingham AL MSA
Bloomington IN MSA Boise City ID MSA
Bismarck ND MSA Cedar Rapids IA MSA
Cheyenne WY MSA Charlottesville VA MSA
Columbia MO MSA Colorado Springs CO MSA
Corpus Christi TX MSA Columbia SC MSA
Columbus OH MSA Daytona Beach FL MSA
Decatur IL MSA Des Moines IA MSA
Decatur AL MSA Dothan AL MSA
Dubuque IA MSA Eau Claire WI MSA
El Paso TX MSA Erie PA MSA
Fayetteville NC MSA Florence SC MSA
Fort Wayne IN MSA Fresno CA MSA

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