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The Daily Microstructure of the Housing Market

Author

Listed:
  • Peter Chinloy

    (Temple University)

  • William D. Larson

    (Federal Housing Finance Agency)

Abstract

The microstructure of the housing market includes periodic buyer liquidity constraints, high transaction costs, and bilateral negotiations on price and timing. These separately introduce daily price volatility and negative serial correlation that is suppressed at a monthly frequency. In a daily U.S. house price index, the annualized standard deviation of returns is 27 percent, versus 3 percent for monthly data. We attribute the daily volatility to repeating calendar-based liquidity price premiums (8 percentage points), transaction costs (7 pp), estimation and composition error (2 pp), and idiosyncratic shocks (10 pp). Monthly house price indices suggest housing has exceptionally high risk-adjusted returns. A daily index brings Sharpe ratios in line with other assets.

Suggested Citation

  • Peter Chinloy & William D. Larson, 2017. "The Daily Microstructure of the Housing Market," FHFA Staff Working Papers 17-01, Federal Housing Finance Agency.
    • Handle: RePEc:hfa:wpaper:17-01
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    References listed on IDEAS

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    Cited by:

    1. Yang, Jian & Tong, Meng & Yu, Ziliang, 2021. "Housing market spillovers through the lens of transaction volume: A new spillover index approach," Journal of Empirical Finance, Elsevier, vol. 64(C), pages 351-378.

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    More about this item

    Keywords

    liquidity; market microstructure; daily house price index; mortgages; volatility;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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