Idiosyncratic Risk in Housing Markets

Abstract

This paper studies the idiosyncratic risk component of individual house capital gains using data on resales and intermediate capital investments. The idiosyncratic component is large; its dynamics do not follow a random walk; and its magnitude is associated with proxies of information quality and market liquidity at the level of individual properties. Accounting for idiosyncratic risk substantially changes the assessment of the risk-return trade-off for housing: it reduces Sharpe ratios and makes them holding period dependent. I use a simple quantitative portfolio model to show that homeowners may be willing to make significant payments to insure against idiosyncratic housing risk.

Why Do Borrowers Default on Mortgages? A New Method for Causal Attribution

“…How accurate is this procedure? Giacoletti (2017) finds that the standard deviation (σ) of the error in estimated home values (as compared to actual sale prices) is 18.7 percent. Although in our primary analysis we define positive home equity as measured LTV < 100 percent, in our robustness analysis we also report results for a subsample with measured LTV < 60 percent.…”

Evaluating Homeownership as the Solution to Wealth Inequality

“…14. For a more complete examination of the idiosyncratic risk around homeownership, see Giacoletti (2021).…”

The Total Risk Premium Puzzle

“…In addition, as noted in a recent work by Giacoletti (2016), all these works except the first, assumed price shocks were i.i.d., but Case and Shiller (1987) and Goetzmann (1993) show that at short horizons the volatility does not scale to zero, indicating that care must be taken with regard to the holding period being studied. Giacoletti (2016) looks across horizons and, using CoreLogic data, focuses narrowly on a few real estate markets with big price action (LA, San Francisco, San Diego). He shows that the fraction of individual house price volatility determined by idiosyncratic risk is decreasing as the holding period increases.…”