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Neighborhood externality risk and the homeownership status of properties

  • Christian A.L. Hilber

In contrast to corporate and institutional investors with larger asset portfolios, single owner-occupiers cannot adequately diversify real estate risk. They therefore pay a risk premium that increases with the corresponding risk. Ceteris paribus, homeownership should be relatively less attractive in places with higher real estate risk. Using the American Housing Survey, it is documented that neighborhood externality risk, a major component of real estate risk, substantially reduces the probability that a housing unit is owner-occupied, having controlled for MSA-level and center city unobservable characteristics. Depending on the type of externality, model specification and sample used, a decrease of one specific risk variable by one standard deviation increases the probability that a unit is owner-occupied between 1.5 and 12.3 percent. An analysis of units that change their homeownership status suggests that this effect may be causal.

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Paper provided by Federal Reserve Bank of Chicago in its series Proceedings with number 885.

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Date of creation: 2003
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Publication status: Published in Seeds of growth - sustainable community development
Handle: RePEc:fip:fedhpr:885
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