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Can Owning a Home Hedge the Risk of Moving?

Listed author(s):
  • Todd Sinai
  • Nicholas Souleles

For households that face a possibility of moving across MSAs, the risk of home owning depends on the covariance of the sale prices of their current houses with the purchase prices of their likely future houses. We find empirically that households tend to move between highly correlated MSAs, significantly increasing the distribution of expected correlations in real house price growth across MSAs, and so raising the "moving-hedge" value of owning. Own/rent decisions are sensitive to this hedging value, with households being more likely to own when their hedging value is greater due to higher expected correlations and likelihoods of moving. JEL (D14, R21, R23, R31)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/pol.5.2.282
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File URL: http://www.aeaweb.org/aej/pol/data/2011-0096_data.zip
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Article provided by American Economic Association in its journal American Economic Journal: Economic Policy.

Volume (Year): 5 (2013)
Issue (Month): 2 (May)
Pages: 282-312

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Handle: RePEc:aea:aejpol:v:5:y:2013:i:2:p:282-312
Note: DOI: 10.1257/pol.5.2.282
Contact details of provider: Web page: https://www.aeaweb.org/aej-policy
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References listed on IDEAS
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  1. Karl E. Case & John M. Quigley & Robert J. Shiller, 2001. "Comparing Wealth Effects: The Stock Market versus the Housing Market," Cowles Foundation Discussion Papers 1335, Cowles Foundation for Research in Economics, Yale University.
  2. 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.
  3. Ferreira, Fernando & Gyourko, Joseph & Tracy, Joseph, 2010. "Housing busts and household mobility," Journal of Urban Economics, Elsevier, vol. 68(1), pages 34-45, July.
  4. Campbell, John & Cocco, Joao, 2007. "How Do House Prices Affect Consumption? Evidence from Micro Data," Scholarly Articles 3122600, Harvard University Department of Economics.
  5. David Genesove, 1999. "The Nominal Rigidity of Apartment Rents," NBER Working Papers 7137, National Bureau of Economic Research, Inc.
  6. Todd Sinai & Nicholas S. Souleles, 2005. "Owner-occupied housing as a hedge against rent risk," Working Papers 05-10, Federal Reserve Bank of Philadelphia.
  7. David Genesove & Christopher Mayer, 2001. "Loss Aversion and Seller Behavior: Evidence from the Housing Market," The Quarterly Journal of Economics, Oxford University Press, vol. 116(4), pages 1233-1260.
  8. Orazio P. Attanasio & Laura Blow & Robert Hamilton & Andrew Leicester, 2009. "Booms and Busts: Consumption, House Prices and Expectations," Economica, London School of Economics and Political Science, vol. 76(301), pages 20-50, 02.
  9. Robert J. Shiller, 2008. "Derivatives Markets for Home Prices," NBER Working Papers 13962, National Bureau of Economic Research, Inc.
  10. David Genesove & Christopher J. Mayer, 1993. "Equity and time to sale in the real estate market," Working Papers 93-6, Federal Reserve Bank of Boston.
  11. Charles Calomiris & Stanley D. Longhofer & William Miles, 2009. "The (Mythical?) Housing Wealth Effect," NBER Working Papers 15075, National Bureau of Economic Research, Inc.
  12. Chan, Sewin, 2001. "Spatial Lock-in: Do Falling House Prices Constrain Residential Mobility?," Journal of Urban Economics, Elsevier, vol. 49(3), pages 567-586, May.
  13. Jeremy C. Stein, 1995. "Prices and Trading Volume in the Housing Market: A Model with Down-Payment Effects," The Quarterly Journal of Economics, Oxford University Press, vol. 110(2), pages 379-406.
  14. Wenli Li & Rui Yao, 2005. "The life-cycle effects of house price changes," Working Papers 05-7, Federal Reserve Bank of Philadelphia.
  15. Shiller, Robert J., 1993. "The theory of index-based futures and options markets," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 8(2), pages 163-178.
  16. Ortalo-Magne, Francois & Rady, Sven, 2002. "Tenure choice and the riskiness of non-housing consumption," Journal of Housing Economics, Elsevier, vol. 11(3), pages 266-279, September.
  17. Cunningham, Christopher R. & Engelhardt, Gary V., 2008. "Housing capital-gains taxation and homeowner mobility: Evidence from the Taxpayer Relief Act of 1997," Journal of Urban Economics, Elsevier, vol. 63(3), pages 803-815, May.
  18. Hurst, Erik & Stafford, Frank, 2004. "Home Is Where the Equity Is: Mortgage Refinancing and Household Consumption," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(6), pages 985-1014, December.
  19. Meese Richard & Wallace Nancy, 1994. "Testing the Present Value Relation for Housing Prices: Should I Leave My House in San Francisco?," Journal of Urban Economics, Elsevier, vol. 35(3), pages 245-266, May.
  20. Davidoff, Thomas, 2006. "Labor income, housing prices, and homeownership," Journal of Urban Economics, Elsevier, vol. 59(2), pages 209-235, March.
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