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Hedging house price risk in the presence of lumpy transaction costs

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  • Han, Lu
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    Abstract

    This paper presents a life-cycle model of housing demand with uncertain house prices and lumpy transaction costs. The paper extends the (S,s) methodology to a non-stationary discrete time framework with multivariate stochastic price processes. This allows the characterization of a self-hedging mechanism in an incomplete housing market: households use earlier accumulated housing wealth to hedge against future housing cost risk. As a result, the direction of the effect of price uncertainty on housing demand depends critically on households' future housing consumption plans. When price uncertainty increases, households consume (and thereby invest in) less housing if they plan to realize the housing wealth gain. However, they will instead take a larger housing position if they plan to move to a bigger home in a correlated housing market in the future.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Urban Economics.

    Volume (Year): 64 (2008)
    Issue (Month): 2 (September)
    Pages: 270-287

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    Handle: RePEc:eee:juecon:v:64:y:2008:i:2:p:270-287

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    Web page: http://www.elsevier.com/locate/inca/622905

    Related research

    Keywords: Housing demand under price uncertainty Hedge Life cycle;

    References

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    1. Todd Sinai & Nicholas S. Souleles, 2005. "Owner-occupied housing as a hedge against rent risk," Working Papers, Federal Reserve Bank of Philadelphia 05-10, Federal Reserve Bank of Philadelphia.
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    Cited by:
    1. Jonathan Halket & Michael Amior, 2012. "Do Households Use Homeownership To Insure Themselves? Evidence Across U.S. Cities," Economics Discussion Papers, University of Essex, Department of Economics 718, University of Essex, Department of Economics.
    2. Jonathan Halket & Santhanagopalan Vasudev, 2012. "Home Ownership, Savings, and Mobility Over The Life Cycle," Economics Discussion Papers, University of Essex, Department of Economics 712, University of Essex, Department of Economics.
    3. Morris A. Davis & Stijn Van Nieuwerburgh, 2014. "Housing, Finance and the Macroeconomy," NBER Working Papers 20287, National Bureau of Economic Research, Inc.
    4. Jonathan Halket & Santhanagopalan Vasudev, 2014. "Saving Up or Settling Down: Home Ownership over the Life Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(2), pages 345-366, April.
    5. Lynn Wu & Erik Brynjolfsson, 2014. "The Future of Prediction: How Google Searches Foreshadow Housing Prices and Sales," NBER Chapters, National Bureau of Economic Research, Inc, in: Economics of Digitization National Bureau of Economic Research, Inc.
    6. M.I. Dröes & H. Garretsen & W.J.J. Manshanden, 2012. "The Diversification Benefits of Free Trade in House Value," Working Papers, Utrecht School of Economics 12-03, Utrecht School of Economics.
    7. Paciorek, Andrew & Sinai, Todd, 2012. "Does home owning smooth the variability of future housing consumption?," Journal of Urban Economics, Elsevier, Elsevier, vol. 71(2), pages 244-257.
    8. Dröes, Martijn I. & Hassink, Wolter H.J., 2013. "House price risk and the hedging benefits of home ownership," Journal of Housing Economics, Elsevier, Elsevier, vol. 22(2), pages 92-99.

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