The Risks of Homeownership
Saturday, Jan. 5, 2019 2:30 PM - 4:30 PM
- Chair: Edward Coulson, University of California-Irvine
Natural Disasters and Housing Markets: The Tenure Choice Channel
AbstractWe analyze a new database of natural disasters in the U.S. that we integrate with real estate and mortgage variables. We uncover several new facts: 1) Natural disasters permanently increase housing rents. The effects on housing prices are ambiguous. 2) Conforming mortgage applications for low-mid size homes fall. However, jumbo applications slightly increase. Lending standards do not change; 3) Homeownership rates decline. The previous facts suggest a new tenure choice channel in which low and mid income households hedge natural disasters by moving from the ownership to the rental market. Wealthy households expand their housing holdings. The tenure choice channel seems especially strong for flooding, which are the riskiest disasters as insurance companies do not cover them.
House as a Portfolio: Are Risks Important?
Abstract"There are two features of housing that differentiate it from most everything else one could buy. First, residential real estate is both investment and consumption good. Second, all real estate assets are at least to some extent unique. This uniqueness is a product of numerous characteristics, some easily observable and quantifiable, others---not. The simplest observable characteristics include square footage, age, and the number of bathrooms. The well-known hedonic model considers a house as a portfolio of its characteristics, where the price of the house is based on the value of each characteristic, while the values are determined by utility derived from each characteristic. Hence, the standard hedonic estimation can price a house, but does so in the paradigm of a house as a consumption good. We utilize the hedonic framework, but do so through the prism of portfolio analysis. Different combinations of characteristics endow the house with its particular risk exposures, different from its neighbors. The same set of characteristics in different locations is also associated with varying levels of risk. We find that these house-specific risk variations are substantial. They are also materially related to the owner's behavior in terms of chosen home improvements, financing and foreclosure decisions. Hence, the personal choice of a house, and its implied value risk, spills over to other financial risks and financial risks of others."
The Effects of Local Risk on Homeownership
AbstractHousing is a local good, and local risk could affect housing decisions. We develop a household intertemporal choice model to illustrate how local income risks affect household tenure choice and housing price through financial investment effect and consumption hedging effect. We decompose income dynamics into three components: idiosyncratic growth (local alpha), systematic risk (local beta) and idiosyncratic risk (local sigma). Using the Current Population Survey 1999-2014, we find that households have stronger incentives to purchase housing asset in a region with higher systematic risk and lower idiosyncratic risk, due to consumption hedging effect and financial investment effect respectively. Effects are stronger in the areas with low housing supply elasticity. Price-to-rent ratios also increase with local alpha and local beta and decrease with local sigma.
- R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location
- J2 - Demand and Supply of Labor