Idiosyncratic Risk in Housing Markets
68 Pages Posted: 3 Jul 2017 Last revised: 10 Jan 2019
Date Written: June 30, 2017
This paper studies idiosyncratic risk at the level of individual house resales. It is commonly assumed that the idiosyncratic price component follows a random walk. I show that housing market data reject this model, and that idiosyncratic risk is instead close to constant for holding periods up to 10 years. Moreover, using an instrument for ZIP Code-level shocks to mortgage credit, I show that a contraction in local credit availability increases idiosyncratic risk. Finally, I show that accounting for the idiosyncratic component substantially flattens the term structure of total housing risk. The term structure is steeper in lower income ZIP Codes.
Keywords: Idiosyncratic Risk, Housing, Market Liquidity, Portfolio Decisions
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation