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Owner-Occupied Housing as a Hedge Against Rent Risk

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  • Todd Sinai
  • Nicholas S. Souleles

Abstract

The conventional wisdom that homeownership is very risky ignores the fact that the alternative, renting, is also risky. Owning a house provides a hedge against fluctuations in housing costs, but in turn introduces asset price risk. In a simple model of tenure choice with endogenous house prices, we show that the net risk of owning declines with a household's expected horizon in its house and with the correlation in housing costs in future locations. Empirically, we find that both house prices, relative to rents, and the probability of homeownership increase with net rent risk.

Suggested Citation

  • Todd Sinai & Nicholas S. Souleles, 2005. "Owner-Occupied Housing as a Hedge Against Rent Risk," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(2), pages 763-789.
    • Handle: RePEc:oup:qjecon:v:120:y:2005:i:2:p:763-789.
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    File URL: http://hdl.handle.net/10.1093/qje/120.2.763
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    JEL classification:

    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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