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This study addresses the recent performance of the U.S. residential real estate market. We investigate the comovement among Case-Shiller Home Price Indices for 14 metropolitan areas from January 1987 to October 2006. We identify the portion of this comovement deemed as excessive, which we define as the covariation that cannot be attributed to common fundamental factors (i.e., factors that directly influence real estate prices). We find that the degree of observed raw comovement in these markets increased over the sample period, most significantly so in the late 1990s, but that this increase is largely due to systemic shocks; the degree of excess comovement is a less important factor. Further analysis indicates that the dynamics of observed raw comovement among metropolitan U.S. residential real estate markets is mostly attributable to underlying systematic real and financial shocks. We conclude that contagion played only a minor role in the evolution of U.S real estate prices over the last two decades.


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