Housing risk and return : evidence from a housing asset-pricing model

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. The
paper specifies and tests a housing asset pricing model (H-CAPM), 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 H-CAPM results to inclusion of controls for
socioeconomic variables commonly represented in the house price literature,
including changes in employment, affordability, and foreclosure incidence.
Consistent with the traditional CAPM, 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
CAPM results are robust to the inclusion of other explanatory variables, including
standard measures of risk and other housing market fundamentals. Additional tests of
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.