In some U.S. metropolitan areas house prices increased dramatically during the last few years. The increase in house prices is substantial even if one looks at the average state-level price, which smooths out the differences across local markets within each state. The dark bars in Figure 1 show the annualized average growth rates from the first quarter of 2001 to the last quarter of 2005 in the OFHEO (Office of Federal Housing Enterprise Oversight) house price indexes, deflated by the core PCE inflation, for the forty-eight contiguous U.S. states.
In this five-year period house price indexes increased more then ten percent per year in several states on both the East and the West Coasts, notably California, Florida, Nevada, Maryland, Rhode Island, New Jersey and Virginia. The rise in house prices has been very uneven across the nation, with some states, like Texas and Ohio, growing at two percent per year. If we compare the growth in house prices in the last five years with the average growth since 1986, we find that states like Florida have grown two and half times their average, while other states, like Michigan, have grown twenty-five percent less than average.
From the perspective of the current debate, an important question is whether the widespread, but not homogeneous, increase in house prices reflects a national phenomenon or rather, in the words of Chairman Greenspan, a collection of “local bubbles.” The answer to this question has important policy implications. “Local bubbles” are most likely attributable to local factors, i.e., circumstances that are specific to each geographic market, rather than to monetary policy, which is the same across the nation. On the contrary, if the boom in house prices is a national phenomenon, monetary policy may well be a likely suspect.