Can Housing Risk Be Diversified? A Cautionary Tale from the Housing Boom and Bust
Review of Financial Studies, Forthcoming
40 Pages Posted: 11 Oct 2014
Date Written: September 18, 2014
This study evaluates the effectiveness of geographic diversification in reducing housing investment risk. To characterize diversification potential, we estimate spatial correlation and integration among 401 US metropolitan housing markets. The 2000s boom brought a marked uptrend in housing market integration associated with eased residential lending standards and rapid growth in private mortgage securitization. As boom turned to bust, macro factors, including employment and income fundamentals, contributed importantly to the trending up in housing return integration. Portfolio simulations reveal substantially lower diversification potential and higher risk in the wake of increased market integration.
Keywords: integration, housing risk diversification, housing returns
JEL Classification: G10, G11, G12, G14, R12, R21
Suggested Citation: Suggested Citation