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

Abstract

This paper addresses housing asset pricing and highlights time‐varying exposures of state‐level housing risk premiums to five varieties of housing risk factors. The economic, demographic, liquidity and credit risk factors along with a market risk factor are included in the augmented factor‐based framework, Bayesian Model Averaging with Stochastic Break Betas and Stochastic Break Volatility (BMA‐SBB‐SBV). Time‐varying sensitivities of state‐level housing price returns are universally evident for all the five housing risk factors considered. State‐level housing markets with high bubble‐vulnerability display different exposures to systematic and liquidity risks from those regarded as less‐vulnerable to housing bubbles. The trivial abnormal returns, high probabilities of risk factor inclusion and low probabilities of breaks in responses to housing risk factors jointly provide evidence that the augmented factor‐based model is capable of characterizing state‐level housing returns.