My hope in this post was to stimulate further debate as to what Martin Wolk had written about Ben Bernanke’s claim about a relationship between job growth and housing price increases. CalculatedRisk read the data in the same way that Wolk read it, while James Hamilton ran a regression with employment growth as the explanatory variable. He finds that employment growth can explain 17% of the increase in housing prices, which leaves 83% of the variability of housing price changes unexplained. Of course, Bernanke had noted that changes in other fundamentals are at play so it is not surprising that this single factor regression leaves most of the changes in housing prices to other factors. Hamilton concludes by saying the following statement may be reasonable:
While speculative behavior appears to be surfacing in some local markets, strong economic fundamentals are contributing importantly to the housing boom.
This statement may be reasonable, but a single factor regression that explains only 17% of the observed variability is not going to settle the debate as to whether there is a speculative bubble in the housing market.