Price-volume Correlation in the Housing Market: Causality and Co-movements (P.1)

Price-volume Correlation in the Housing Market:
Causality and Co-movements

Jim Clayton & Norman Miller & Liang Peng
Published online: 28 May 2008
# Springer Science + Business Media, LLC 2008
Abstract Housing market cycles are featured by a positive correlation of prices and
trading volume, which is conventionally attributed to a causal relationship between
prices and volume. This paper analyzes the housing markets in 114 metropolitan
statistical areas in the United States from 1990 to 2002, treats both prices and
volume as endogenous variables, and studies whether and how exogenous shocks
cause co-movements of prices and volume. At quarterly frequency, we find that,
first, both home prices and trading volume are affected by conditions in labor
markets, the mortgage market, and the stock market, and the effects differ between
markets with low and high supply elasticity. Second, home prices Granger cause
trading volume, but the effects are asymmetric—decreases in prices reduce trading
volume, and increases in prices have no effect. Third, trading volume also Granger
causes home prices, but only in markets with inelastic supply. Finally, we find a
statistically significant positive price–volume correlation; which, however, is mainly
explained by co-movements of prices and volume caused by exogenous shocks,
instead of the Granger causality between prices and volume.
Keywords Housing market . Price volume correlation . Granger causality
JEL Classification E32 . G14
J Real Estate Finan Econ (2010) 40:14–40
DOI 10.1007/s11146-008-9128-0
J. Clayton
Pension Real Estate Association, 100 Pearl Street, 13th Floor, Hartford, CT 06103, USA
N. Miller
School of Business Administration, University of San Diego, 5998 Alcalá Park,
San Diego, CA 92110-2492, USA
L. Peng (*)
Leeds School of Business, University of Colorado at Boulder, 419 UCB,
Boulder, CO 80309-0419, USA

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