Can Metropolitan Housing Risk be Diversified? A Cautionary Tale from the Recent Boom and Bust

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Title: Can Metropolitan Housing Risk be Diversified? A Cautionary Tale from the Recent Boom and Bust
Authors: Cotter, John
Gabriel, Stuart A.
Roll, Richard
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Date: Jul-2012
Abstract: Geographic diversification is fundamental to risk mitigation among investors and insurers of housing, mortgages, and mortgage-related derivatives. To characterize diversification potential, we provide estimates of integration, spatial correlation, and contagion among US metropolitan housing markets. Results reveal a high and increasing level of integration among US markets over the decade of the 2000s, especially in California. We apply integration results to assess the risk of alternative housing investment portfolios. Portfolio simulation indicates reduced diversification potential and increased risk in the wake of estimated increases in metropolitan housing market integration. Research findings provide new insights regarding the synchronous non-performance of geographically-disparate MBS investments during the late 2000s.
Funding Details: Science Foundation Ireland
Type of material: Working Paper
Publisher: University College Dublin. Geary Institute
Copyright (published version): 2012, UCD Geary Institute
Keywords: IntegrationCorrelationContagionHouse price returns
Subject LCSH: Housing--Prices--United States
Housing--Prices--Mathematical models
Real estate investment--Rate of return
Language: en
Status of Item: Not peer reviewed
Appears in Collections:Geary Institute Working Papers
FMC² Research Collection
Business Research Collection

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