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Housing Risk and Return: Evidence From a Housing Asset-Pricing Model

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Author Info

  • Karl Case

    (Wellesley College)

  • John Cotter

    (University College Dublin)

  • Stuart Gabriel

    (UCLA)

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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File URL: http://www.ucd.ie/geary/static/publications/workingpapers/gearywp201005.pdf
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Bibliographic Info

Paper provided by Geary Institute, University College Dublin in its series Working Papers with number 201005.

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Length: 39 pages
Date of creation: 01 Jan 2010
Date of revision:
Handle: RePEc:ucd:wpaper:201005

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Keywords: asset pricing; house price returns; risk factors;

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References

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  1. Markus K Brunnermeier & Christian Julliard, 2006. "Money Illusion and Housing Frenzies," FMG Discussion Papers dp579, Financial Markets Group.
  2. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing High House Prices: Bubbles, Fundamentals and Misperceptions," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 67-92, Fall.
  3. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
  4. Amit Goyal & Pedro Santa-Clara, 2003. "Idiosyncratic Risk Matters!," Journal of Finance, American Finance Association, vol. 58(3), pages 975-1008, 06.
  5. Monika Piazzesi & Martin Schneider & Selale Tuzel, 2006. "Housing, Consumption, and Asset Pricing," NBER Working Papers 12036, National Bureau of Economic Research, Inc.
  6. Hanno Lustig & Stijn Van Nieuwerburgh, 2003. "Housing Collateral, Consumption Insurance and Risk Premia: An Empirical Perpective," NBER Working Papers 9959, National Bureau of Economic Research, Inc.
  7. Joseph Gyourko & Eduardo Morales & Charles Nathanson & Edward Glaeser, 2011. "Housing Dynamics," 2011 Meeting Papers 307, Society for Economic Dynamics.
  8. Case, Bradford & Quigley, John M, 1991. "The Dynamics of Real Estate Prices," The Review of Economics and Statistics, MIT Press, vol. 73(1), pages 50-58, February.
  9. Stuart A. Gabriel & Joe P. Mattey & William L. Wascher, 1999. "House price differentials and dynamics: evidence from the Los Angeles and San Francisco metropolitan areas," Economic Review, Federal Reserve Bank of San Francisco, pages 3-22.
  10. Shanken, Jay, 1992. "On the Estimation of Beta-Pricing Models," Review of Financial Studies, Society for Financial Studies, vol. 5(1), pages 1-33.
  11. Gibbons, Michael R & Ross, Stephen A & Shanken, Jay, 1989. "A Test of the Efficiency of a Given Portfolio," Econometrica, Econometric Society, vol. 57(5), pages 1121-52, September.
  12. Lehmann, Bruce N., 1990. "Residual risk revisited," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 71-97.
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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. John Cotter & Stuart Gabriel & Richard Roll, 2012. "Can metropolitan housing risk be diversified? A cautionary tale from the recent boom and bust," Working Papers 201217, Geary Institute, University College Dublin.
  3. Eli Beracha & Hilla Skiba, 2013. "Findings from a Cross-Sectional Housing Risk-Factor Model," The Journal of Real Estate Finance and Economics, Springer, vol. 47(2), pages 289-309, August.
  4. M.I. Dröes & H. Garretsen & W.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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