Local Prospects and Housing Dynamics: the Asset Pricing Consequences of Consumption Commitments

75 Pages Posted: 18 Aug 2016 Last revised: 5 Nov 2019

Date Written: October 15, 2019

Abstract

Using a measure of local long-run growth prospects, I uncover a novel link between economic fundamentals and prices of a segmented asset class, housing. While excess housing returns are positively associated with the level of growth prospects, housing valuations (price-to-rent ratios) are negatively associated with shocks to growth prospects. I document an explanation for this in MSAlevel consumption data: housing consumption is asymmetrically exposed to growth prospects in that it expands more quickly when prospects are strong than it contracts when prospects are poor. I replicate and empirically investigate related return and valuation regressions using an asset pricing model that combines a persistent component in real wage growth, Epstein and Zin (1989) preferences, and nonseparable housing services (with a commitment to consume) and nonhousing consumption.

Keywords: Asset Pricing, Consumption Commitments, Long-Run Risk, Real Estate

JEL Classification: D81, E21, G11, G12, R30

Suggested Citation

Kantak, Preetesh, Local Prospects and Housing Dynamics: the Asset Pricing Consequences of Consumption Commitments (October 15, 2019). Available at SSRN: https://ssrn.com/abstract=2824605 or http://dx.doi.org/10.2139/ssrn.2824605

Preetesh Kantak (Contact Author)

Kelley School of Business ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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