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Risk and Return in the U.S. Housing Market: A Cross‐Sectional Asset‐Pricing Approach
Author(s) -
Can Susanne,
Miller Norman G.,
Pandher Gurupdesh S.
Publication year - 2006
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/j.1540-6229.2006.00177.x
Subject(s) - economics , metropolitan area , volatility (finance) , capital asset pricing model , financial economics , volatility clustering , stock market , stock (firearms) , econometrics , autoregressive conditional heteroskedasticity , medicine , paleontology , mechanical engineering , pathology , horse , engineering , biology
This article carries out an asset‐pricing analysis of the U.S. metropolitan housing market. We use ZIP code–level housing data to study the cross‐sectional role of volatility, price level, stock market risk and idiosyncratic volatility in explaining housing returns. While the related literature tends to focus on the dynamic role of volatility and housing returns within submarkets over time, our risk–return analysis is cross‐sectional and covers the national U.S. metropolitan housing market. The study provides a number of important findings on the asset‐pricing features of the U.S. housing market. Specifically, we find (i) a positive relation between housing returns and volatility, with returns rising by 2.48% annually for a 10% rise in volatility, (ii) a positive but diminishing price effect on returns and (iii) that stock market risk is priced directionally in the housing market. Our results on the return‐volatility‐price relation are robust to (i) metropolitan statistical area clustering effects and (ii) differences in socioeconomic characteristics among submarkets related to income, employment rate, managerial employment, owner‐occupied housing, gross rent and population density.