Convergence in condominium prices of major U.S. metropolitan areas

Abstract

The purpose of the study is to examine the long-run convergence properties of condominium prices based on the ripple effect for five major U.S. metropolitan areas (Boston, Chicago, Los Angeles, New York, and San Francisco). Specifically, we test for both overall convergence in condominium prices and the possibility of distinct convergence clubs to ascertain the interdependence of geographically dispersed metropolitan condominium markets. Our analysis employs two approaches to identify the convergence properties of condominium prices: the Lee and Strazicich (2003) unit root test with endogenous structural breaks and the Phillips and Sul (2007; 2009) time-varying nonlinear club convergence tests. The Lee and Strazicich (2003) unit root tests identify two structural breaks in 2006 and 2008 with rejection of the null hypothesis of a unit root and long-run convergence in condominium prices in the cases of Boston and New York. The Phillips and Sul 92007; 2009) club convergence test reveals the absence of overall convergence in condominium prices across all metropolitan areas, but the emergence of two distinct convergence clubs with clear geographical segmentation: on the east coast with Boston and New York and the west coast with Los Angeles and San Francisco while Chicago exhibits a non-converging path. The results highlight the distinct geographical segmentation of metropolitan condominium markets, which provides useful information to local policymakers, financial institutions, real estate developers, and real estate portfolio managers. The limitations of the research is the identification of the underlying sources for the convergence clubs identified due to the availability of monthly data for a number of potential variables. The absence of overall convergence in condominium prices, but the emergence of distinct convergence clubs that reflects the geographical segmentation of metropolitan condominium markets raises the potential for portfolio diversification. Unlike previous studies that have focused on single-family housing, this is the first study to examine the convergence of metropolitan area condominium prices.