Time variation in the relative importance of permanent and transitory components in the U.S. housing market

•We use an UC model with heteroskedasticity to model house prices in the U.S.•Time-variation in the ratio of permanent and transitory shocks is estimated.•We find a big increase in the importance of transitory shock during 2007-2009.•We show that house prices were more than 20% above the trend in 2006.

This paper uses an unobserved component model with heteroskedastic disturbances based on Harvey et al. (1992) to measure the time-varying importance of permanent and transitory components in the U.S. house prices. Our findings show that the cyclical component in the U.S. housing market is highly persistent and house prices were more than 20% above the trend at the peak of the housing boom in 2006. Our results also suggest that there was a big increase in the relative importance of the transitory shock variance at the peak of the housing crisis.