Structural Breaks : A Shift of Roles in the Relationship between Real Estate Regional Industry

Abstract

We conduct an analysis of connectivity between regional housing markets and regional industry by examining 10 consolidated metropolitan statistical areas (CMSAs) in the Case-Shiller Index and stock portfolios representing the economic base for each region. We test for cointegrating relationships between real estate markets and industry performance and find that, prior to the recent real estate market collapse, prices in the housing market are dependent on industry performance; post-collapse, however, this relationship changes. Our results suggest that the recent financial crisis was so severe that it resulted in a structural break in the causal relationship between regional industry performance and real estate markets.