Housing risk and return : evidence from a housing asset-pricing model
24 May 2010
22T12:09:12Z November 2010
This paper investigates the risk-return relationship in determination of housing asset pricing. In so doing, the paper evaluates behavioral hypotheses advanced by Case and Shiller (1988, 2002, 2009) in studies of boom and post-boom housing markets. Assuming investment is restricted to housing, the paper specifies and tests a housing asset pricing model, whereby expected returns of metropolitan-specific housing markets are equated to the market return, as represented by aggregate US house price time-series. We augment the model by examining the impact of additional risk factors including aggregate stock market returns, idiosyncratic risk, momentum, and Metropolitan Statistical Area (MSA) size effects. Further, we test the robustness of the asset pricing results to inclusion of controls for socioeconomic variables commonly represented in the house price literature, including changes in employment, affordability, and foreclosure incidence. We find a sizable and statistically significant influence of the market factor on MSA house price returns. Moreover we show that market betas have varied substantially over time. Also, we find the basic housing model results are robust to the inclusion of other explanatory variables, including standard measures of risk and other housing market fundamentals. Additional tests on the validity of the model using the Fama-MacBeth framework offer further strong support of a positive risk and return relationship in housing. Our findings are supportive of the application of a housing investment risk-return framework in explanation of variation in metro-area cross-section and time-series US house price returns. Further, results strongly corroborate Case-Shiller behavioral research indicating the importance of speculative forces in the determination of U.S. housing returns.
Science Foundation Ireland
UCLA Ziman Center for Real Estate.
Type of Material
University College Dublin. School of Business. Centre for Financial Markets
Centre for Financial Markets working paper series
Subject – LCSH
Real estate investment--Rate of return
Status of Item
Not peer reviewed
This item is made available under a Creative Commons License