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Owner-occupied housing as a hedge against rent risk

  • Todd Sinai
  • Nicholas S. Souleles

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, the authors 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, they find that both house prices, relative to rents, and the probability of homeownership increase with net rent risk

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 05-10.

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Date of creation: 2005
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Handle: RePEc:fip:fedpwp:05-10
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