The Local Employment Effect of House Prices: Evidence from U.S. States

We examine the local demand channel hypothesis of the housing market that predicts a larger response of employment in the non-tradable sector to house price shocks than employment in the tradable sector using state-level monthly data from 1990:M1-2019:M12. Our results from a panel VAR model and out-of-sample forecasting analysis confirm a larger response of non-tradable employment to house price changes. In addition, we also find that unlike short-lived responses to shocks to income and building permits, house price shocks have a very persistent effect on employment. Our findings suggest that states with inelastic housing supply and more volatile house prices tend to have a bigger improvement in forecasting performance for non-tradable employment than for tradable employment.