Getting on and Moving Up the Property Ladder: Real Hedging in the U.S. Housing Market Before and After the Crisis

Abstract

Real hedging is the practice of getting onto the property ladder in order to trade up to a larger home in the future. We define the value of the real hedge of home ownership as the difference between the risk premiums of renting and owning and explore how this value depends on local housing price dynamics and household characteristics. Controlling for the potential endogeneity of housing bubble bursts across different U.S metropolitan areas, we find a significantly higher correlation in the appreciation rates across the Standard & Poor's Case-Shiller tiered house price indices in the period after the housing crisis. We conclude that real hedging has become more attractive in the period after the crisis, particularly in markets exhibiting momentum and high volatility in returns.

Price Exuberance and Contagion across Housing Markets: Evidence from US Metropolitan Areas

“…Our results have practical implications for homeowners and investors. It is well established that household decisions are driven in part by hedging incentives Souleles, 2005, 2013;Han, 2010;Damianov and Escobari, 2021). The contagion effects established here, indicating increases in correlations across housing markets, serve to lower the volatility of lifetime wealth for households seeking to relocate to another metropolitan area.…”

“…The main focus of the existing literature Souleles, 2005, 2013;Han 2010;Damianov and Escobari 2021) has been on studying the hedging incentives of households. In this literature, correlations are treated as being exogenous, and the analysis explores how they impact the volatility of lifetime wealth of households engaging in real hedging strategies.…”

“…Damianov and Escobari (2021) examine correlations across price tiers in the same metropolitan area rather than correlations across MSAs.…”

Profitability and financial performance of Italian real estate companies: quantitative profiles

“…This research implements the growing reflection of scholars on the effects of the pandemic crisis on the real estate market (Taşan-Kok et al ., 2021; Damianov and Escobari, 2021; Horno-Bueno et al ., 2022), highlighting the consequences of the spread of distance working on the real estate market (Gupta et al ., 2022; Chmielewska et al ., 2022; Micelli and Righetto, 2022), the effects of panic (Karthiyaini et al ., 2020) and the more modest impact of public interventions (Pilinkiene et al ., 2021).…”