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Measuring and Analyzing Returns on Aggregate Residential Housing

Author

Listed:
  • Fuad Hasanov

    (Oakland University)

  • Douglas Dacy

    (University of Texas at Austin)

Abstract

This paper computes an aggregate real after-tax rate of return on residential real estate in the United States. We account for net rental income, capital gain, and subsidies due to tax provisions for homeowners in constructing a total return measure. We also compute separate returns to owners and rentiers (that is, households who rent to others). Both quarterly and annual data over 1952-2000 period are used in the analysis. We compare our measure of return with that in the literature and analyze how housing compares to other assets in the household portfolio. Our approach provides a more comprehensive measure of return than that found in the literature. We confirm that residential housing provides a high average return and low volatility, has low correlation with other assets such as stocks and bonds, and exhibits high positive correlation with inflation. The efficient frontier analysis shows that the residential housing providing diversification should be an important part of the household portfolio. Our results also indicate that housing may be as good an investment as stocks (S&P 500).

Suggested Citation

  • Fuad Hasanov & Douglas Dacy, 2005. "Measuring and Analyzing Returns on Aggregate Residential Housing," Finance 0510005, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0510005
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    References listed on IDEAS

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    2. Marjorie Flavin & Takashi Yamashita, 1998. "Owner-Occupied Housing and the Composition of the Household Portfolio Over the Life-Cycle," NBER Working Papers 6389, National Bureau of Economic Research, Inc.
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    4. Michael Bond & Michael Seiler, 1998. "Real Estate Returns and Inflation: An Added Variable Approach," Journal of Real Estate Research, Taylor & Francis Journals, vol. 15(3), pages 327-338, January.
    5. Fogler, H Russell & Granito, Michael R & Smith, Laurence R, 1985. "A Theoretical Analysis of Real Estate Returns," Journal of Finance, American Finance Association, vol. 40(3), pages 711-719, July.
    6. Flavin, Marjorie & Yamashita, Takashi, 1998. "Owner-Occupied Housing and the Composition of the Household Portfolio over the Life Cycle," University of California at San Diego, Economics Working Paper Series qt89x293v9, Department of Economics, UC San Diego.
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    More about this item

    Keywords

    housing return; measurement; efficient frontier; household portfolio;
    All these keywords.

    JEL classification:

    • G - Financial Economics

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