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Can Owning a Home Hedge the Risk of Moving?

  • Todd M. Sinai
  • Nicholas S. Souleles

Conventional wisdom holds that one of the riskiest aspects of owning a house is the uncertainty surrounding its sale price, especially if one moves to another housing market. However, households who sell a house typically buy another house, whose purchase price is also uncertain. We show that for such households, home owning often hedges their net exposure to housing market risk, because their sale price covaries positively with house prices in their likely new market. That expected covariance is much higher than previously recognized because there is considerable heterogeneity across city pairs in how much house prices covary and households tend to move between the highly correlated housing markets. Taking these two considerations into account increases the estimated median expected correlation in real house price growth across MSAs from 0.35 to 0.60. Moreover, we show that households' decisions whether to own or rent are sensitive to this "moving-hedge" value. We find that the likelihood of home owning for a mobile household is more than one percentage point higher when the expected house price covariance rises by 38 percent (one standard deviation). This effect attenuates as a household's probability of moving diminishes and thus the moving-hedge value declines.

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File URL: http://www.nber.org/papers/w15462.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15462.

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Date of creation: Oct 2009
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Publication status: published as Todd Sinai & Nicholas Souleles, 2013. "Can Owning a Home Hedge the Risk of Moving?," American Economic Journal: Economic Policy, American Economic Association, vol. 5(2), pages 282-312, May.
Handle: RePEc:nbr:nberwo:15462
Note: AP EFG ME PE
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  1. Fernando Ferreira & Joseph Gyourko & Joseph Tracy, 2008. "Housing Busts and Household Mobility," NBER Working Papers 14310, National Bureau of Economic Research, Inc.
  2. Karl E. Case, John M. Quigley, Robert J. Shiller., 2001. "Comparing Wealth Effects: The Stock Market versus The Housing Market," Economics Working Papers E01-308, University of California at Berkeley.
  3. 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.
  4. John Y. Campbell & Joao F. Cocco, 2004. "How do house prices affect consumption? Evidence from micro data," 2004 Meeting Papers 304, Society for Economic Dynamics.
  5. 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.
  6. 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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