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Housing risk and return : evidence from a housing asset-pricing model

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  • Case, Karl E.
  • Cotter, John
  • Gabriel, Stuart A.

Abstract

This paper investigates the risk-return relationship in determination of housing asset pricing. In so doing, the paper evaluates behavioral hypotheses advanced by Case and Shiller (1988, 2002, 2009) in studies of boom and post-boom housing markets. The paper specifies and tests a housing asset pricing model (H-CAPM), whereby expected returns of metropolitan-specific housing markets are equated to the market return, as represented by aggregate US house price time-series. We augment the model by examining the impact of additional risk factors including aggregate stock market returns, idiosyncratic risk, momentum, and Metropolitan Statistical Area (MSA) size effects. Further, we test the robustness of H-CAPM results to inclusion of controls for socioeconomic variables commonly represented in the house price literature, including changes in employment, affordability, and foreclosure incidence. Consistent with the traditional CAPM, we find a sizable and statistically significant influence of the market factor on MSA house price returns. Moreover we show that market betas have varied substantially over time. Also, we find the basic housing CAPM results are robust to the inclusion of other explanatory variables, including standard measures of risk and other housing market fundamentals. Additional tests of the validity of the model using the Fama-MacBeth framework offer further strong support of a positive risk and return relationship in housing. Our findings are supportive of the application of a housing investment risk-return framework in explanation of variation in metro-area cross-section and time-series US house price returns. Further, results strongly corroborate Case-Shiller behavioral research indicating the importance of speculative forces in the determination of U.S. housing returns.

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Bibliographic Info

Paper provided by University College Dublin in its series Open Access publications from University College Dublin with number urn:hdl:10197/2142.

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Date of creation: Nov 2009
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Handle: RePEc:ner:ucddub:urn:hdl:10197/2142

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Web page: http://www.ucd.ie

Related research

Keywords: Finance; Asset-pricing; Housing investment; Risk management; House price returns; Risk factors;

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  1. Assorted Links
    by Martin Ryan in Geary Behaviour Centre on 2010-04-05 19:32:00
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Cited by:
  1. Cotter, John & Gabriel, Stuart & Roll, Richard, 2011. "Integration and contagion in US housing markets," MPRA Paper 34591, University Library of Munich, Germany.
  2. 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.
  3. John Cotter & Stuart Gabriel & Richard Roll, 2012. "Can Metropolitan Housing Risk be Diversified? A Cautionary Tale from the Recent Boom and Bust," Papers 1208.0371, arXiv.org.

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