Risk Segmentation of American Homes

41 Pages Posted: 23 May 2010

See all articles by Liang Peng

Liang Peng

Smeal College of Business, The Pennsylvania State University

Thomas G. Thibodeau

University of Colorado at Boulder - Leeds School of Business

Date Written: May 21, 2010

Abstract

Home value risk is among the largest financial risks for American households, and the distribution of home value risk across homeowners has important policy implications. This paper empirically examines spatial variation in home value risk across 99 neighborhoods in metropolitan Denver. Four measurements of housing market performance between 2002:1 and 2007:4 - house price levels, average appreciation rates, temporal volatility in those rates and the sensitivity of neighborhood appreciation rates to the overall metropolitan housing market - are regressed on neighborhood socioeconomic characteristics, including income, wealth, unemployment, poverty, etc. The regressions provide strong evidence that all four housing market performance measurements correlate significantly with neighborhood socioeconomic characteristics. More affluent neighborhoods experienced significantly higher average appreciation rates, lower volatility and less sensitivity. This paper also finds that there is no positive relationship between risk and returns of home values across neighborhoods. In fact, neighborhoods with higher house price levels experienced higher average appreciation rates but lower volatility and less sensitivity. This paper concludes that homeownership is more risky and provides significantly lower financial benefits for low-income households.

Suggested Citation

Peng, Liang and Thibodeau, Thomas G., Risk Segmentation of American Homes (May 21, 2010). Available at SSRN: https://ssrn.com/abstract=1612893 or http://dx.doi.org/10.2139/ssrn.1612893

Liang Peng (Contact Author)

Smeal College of Business, The Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

Thomas G. Thibodeau

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

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