Can Owning a Home Hedge the Risk of Moving?
AbstractConventional wisdom holds that one of the riskiest aspects of owning a house is the uncertainty surrounding its sale price, especially if one moves to another housing market. However, households who sell a house typically buy another house, whose purchase price is also uncertain. We show that for such households, home owning often hedges their net exposure to housing market risk, because their sale price covaries positively with house prices in their likely new market. That expected covariance is much higher than previously recognized because there is considerable heterogeneity across city pairs in how much house prices covary and households tend to move between the highly correlated housing markets. Taking these two considerations into account increases the estimated median expected correlation in real house price growth across MSAs from 0.35 to 0.60. Moreover, we show that households’ decisions whether to own or rent are sensitive to this “moving-hedge” value. We find that the likelihood of home owning for a mobile household is more than one percentage point higher when the expected house price covariance rises by 38 percent (one standard deviation). This effect attenuates as a household’s probability of moving diminishes and thus the moving-hedge value declines.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15462.
Date of creation: Oct 2009
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Other versions of this item:
- E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- J61 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Geographic Labor Mobility; Immigrant Workers
- R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
- R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population
- R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Production Analysis, and Firm Location - - - Housing Supply and Markets
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- Sejeong Ha & Christian A. L. Hilber, 2013. "Do Long Distance Moves Discourage Homeownership? Evidence from England," SERC Discussion Papers 0141, Spatial Economics Research Centre, LSE.
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- Christian A. L. Hilber & Wouter Vermeulen, 2012. "The Impact of Supply Constraints on House Prices in England," SERC Discussion Papers 0119, Spatial Economics Research Centre, LSE.
- Tatiana Kirsanova & Jack Rogers, 2013. "Fixed versus Variable Rate Debt Contracts and Optimal Monetary Policy," Discussion Papers 1306, Exeter University, Department of Economics.
- Martijn I. Dröes & Harry Garretsen & Walter J.J. Manshanden, 2012. "The Diversification Benefits of Free Trade in House Value," Working Papers 12-03, Utrecht School of Economics.
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