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Geographic Heterogeneity in Housing Market Risk and Portfolio Choice

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  • Tong-yob Nam

    (U.S. Department of the Treasury)

Abstract

The U.S. housing market is heterogeneous in that house price dynamics vary greatly across regions. Depending on the location of the main residence, households are exposed to completely different housing market risk. This paper examines how geographic heterogeneity in housing market risk affects household portfolio allocations. Housing supply elasticity largely explains variation in housing market risk across regions. Where housing supply elasticity is low, households face higher housing market risk since house price growth rates are more volatile and more positively correlated with stock returns and labor income growth rates. Using the restricted version of the Health and Retirement Study (HRS) data with detailed geographic information, I find that households in areas with low housing supply elasticity tend to hold less stock in their portfolios. This tendency, however, weakens after retirement when labor income risk disappears.

Suggested Citation

  • Tong-yob Nam, 2021. "Geographic Heterogeneity in Housing Market Risk and Portfolio Choice," The Journal of Real Estate Finance and Economics, Springer, vol. 62(4), pages 508-547, May.
    • Handle: RePEc:kap:jrefec:v:62:y:2021:i:4:d:10.1007_s11146-020-09762-9
    DOI: 10.1007/s11146-020-09762-9
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    More about this item

    Keywords

    Geographic heterogeneity; Portfolio choice; Housing market risk; Labor income risk; Retirement;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
    • R20 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - General
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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