Regime shifts in the US housing market: precursors and energy landscape

The crash of the US housing market in 2007 set in motion a sequence of events that culminated in the Global Financial Crisis of 2008-2009. Since then there have been many studies on how the banking system is too interconnected to cope with cascading failures, and whether there can be robust mortgage regimes that can prevent trouble in the housing market from spilling over to the banking system. However, there have been little done to understand the housing market itself. In this talk, we will describe work we have done on detecting early warning signatures in the US housing market, and also how we can develop a picture of the US housing market going through the regime shift. By measuring spectral reddening, increasing auto correlations, increasing coefficients of variation, we present evidence for a series of regime shifts in the US housing market, starting as early as 2004, and lasting through 2009. Treating US cities as different realizations of the US housing market as a whole, we also observe an increase in the skewness of the distribution of average home prices (another precursor signature of the regime shift), but more importantly, we find the trajectory of the average transaction volume moving with dissipation on a bifurcating energy landscape. Based on this energy landscape picture, we identify a point of no return for the US housing market that is earlier than previous accounts could have anticipated.