Does Home Owning Smooth the Variability of Future Housing Consumption?

46 Pages Posted: 6 Nov 2010

See all articles by Andrew Paciorek

Andrew Paciorek

Board of Governors of the Federal Reserve System

Todd M. Sinai

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

Multiple version iconThere are 2 versions of this paper

Date Written: October 22, 2010

Abstract

We show that the hedging benefit of owning a home reduces the variability of housing consumption after a move. When a current home owner's house price covaries positively with housing costs in a future city, changes in the future cost of housing are offset by commensurate changes in wealth before the move. Using Census micro-data, we find that the cross-sectional variation in house values subsequent to a move is lower for home owners who moved between more highly covarying cities. Our preferred estimates imply that an increase in covariance of one standard deviation reduces the variance of subsequent housing consumption by about 11 percent. Households at the top end of the covariance distribution who are likely to have owned large homes before moving get the largest reductions, of up to 40 percent relative to households at the median.

Keywords: Consumption Smoothing, Housing Risk, Housing Demand, Hedge, Home Owning, Home Ownership

JEL Classification: E21, G11, G12, J61, R21, R23, R31, D81, D91

Suggested Citation

Paciorek, Andrew and Sinai, Todd M., Does Home Owning Smooth the Variability of Future Housing Consumption? (October 22, 2010). Available at SSRN: https://ssrn.com/abstract=1703432 or http://dx.doi.org/10.2139/ssrn.1703432

Andrew Paciorek

Board of Governors of the Federal Reserve System ( email )

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Todd M. Sinai (Contact Author)

University of Pennsylvania - The Wharton School ( email )

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