Can Owning a Home Hedge the Risk of Moving?

45 Pages Posted: 1 Nov 2009

See all articles by Todd M. Sinai

Todd M. Sinai

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Nicholas S. Souleles

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: October 22, 2009

Abstract

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.

Keywords: housing demand, house price risk, mobility, tenure choice

JEL Classification: E21, G11, G12, J61, R21, R23, R31

Suggested Citation

Sinai, Todd M. and Souleles, Nicholas S., Can Owning a Home Hedge the Risk of Moving? (October 22, 2009). Available at SSRN: https://ssrn.com/abstract=1496908 or http://dx.doi.org/10.2139/ssrn.1496908

Todd M. Sinai (Contact Author)

University of Pennsylvania - The Wharton School ( email )

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HOME PAGE: http://real.wharton.upenn.edu/~sinai

National Bureau of Economic Research (NBER)

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Nicholas S. Souleles

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-9466 (Phone)
215-898-6200 (Fax)

HOME PAGE: http://finance.wharton.upenn.edu/~souleles

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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