Housing Risk and Return: Evidence from a Housing Asset-Pricing Model

48 Pages Posted: 4 Dec 2009 Last revised: 7 May 2015

See all articles by Karl E. Case

Karl E. Case

Wellesley College

John Cotter

University College Dublin; UCLA Anderson School of Management

Stuart A. Gabriel

University of California, Los Angeles - Anderson School of Management

Date Written: April 16, 2011

Abstract

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 thatmarket 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.

Keywords: asset pricing, house price returns, risk factors

JEL Classification: G10, G11, G12

Suggested Citation

Case, Karl E. and Cotter, John and Gabriel, Stuart A., Housing Risk and Return: Evidence from a Housing Asset-Pricing Model (April 16, 2011). Available at SSRN: https://ssrn.com/abstract=1517195 or http://dx.doi.org/10.2139/ssrn.1517195

Karl E. Case

Wellesley College ( email )

106 Central Street
Wellesley, MA 02181
United States
617-973-3957 (Phone)
617-283-3639 (Fax)

John Cotter (Contact Author)

University College Dublin ( email )

School of Business, Carysfort Avenue
Blackrock, Co. Dublin
Ireland
353 1 716 8900 (Phone)
353 1 283 5482 (Fax)

HOME PAGE: http://www.ucd.ie/bankingfinance/staff/professorjohncotter/

UCLA Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Stuart A. Gabriel

University of California, Los Angeles - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
310-825-2922 (Phone)
310-206-5455 (Fax)

HOME PAGE: http://www.anderson.ucla.edu

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