New sources of housing market risk: Asset pricing for the US state‐level housing markets

Abstract

This study develops three novel housing risk factors to explore the sources of risk in US state‐level housing markets. The asset‐pricing models enrich our investigations into housing markets from three perspectives: housing boom–bust, volatile–calm, and factors’ time‐varying impact regimes. The findings indicate that state‐level housing returns all show significant exposure to systemic risk of housing markets, but the demographic and economic factors’ explanatory powers for housing returns differ across markets. Although the liquidity factor is significant under all three frameworks, the inventory and credit factors show significant impacts only in the impact‐switching specification. There are differences in the responses of housing returns to various risk factors and shifts in housing regimes across state housing markets, depending on whether the states exhibited housing bubbles. The results suggest that an effective housing stabilization mechanism must be capable of tracking shifts in the relations between housing markets and risk factors.

Time‐varying roles of housing risk factors in state‐level housing markets

“…The papers investigating state‐level housing markets in the United States have accumulated vastly (i.e. Del Negro and Otrok (2007), Holly, Pesaran, and Yamagata (2010), Rapach and Strauss (2009), Huang (2017, 2018, 2020), Huang and Chiang (2017), among many others). For instance, Del Negro and Otrok (2007) find that divergence in house price dynamics lies in states' exposures to the national housing risk.…”

“…Noticeably, California, Florida and Pennsylvania are commonly classified as bubble states by empirical studies on state‐level housing markets (e.g. Case & Shiller, 2003, Holly et al, 2010, Rapach & Strauss, 2009, and Huang, 2020), and they show higher housing‐return sensitivity to the liquidity risk than other states (Figure 5). In addition, their responses to the turnover factor all weaken during the housing crisis.…”