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Can Housing Risk be Diversified? A Cautionary Test from the Housing Boom and Bust

Cotter, John and Gabriel, Stuart and Roll, Richard (2014) Can Housing Risk be Diversified? A Cautionary Test from the Housing Boom and Bust. Social Science Working Paper, 1398. California Institute of Technology , Pasadena, CA. (Unpublished)

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This study evaluates the effectiveness of geographic diversification in reducing housing investment risk. To characterize diversification potential, we estimate spatial correlation and integration among 401 US metropolitan housing markets. The 2000s boom brought a marked uptrend in housing market integration associated with eased residential lending standards and rapid growth in private mortgage securitization. As boom turned to bust, macro factors, including employment and income fundamentals, contributed importantly to the trending up in housing return integration. Portfolio simulations reveal substantially lower diversification potential and higher risk in the wake of increased market integration.

Item Type:Report or Paper (Working Paper)
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Additional Information:The authors gratefully acknowledge research support from the UCLA Ziman Center for Real Estate. Cotter also acknowledges the support of Science Foundation Ireland under Grant Number 08/SRC/FM1389. The authors thank workshop participants at UCLA, the Red Rock Finance Conference, the 2013 EFA Annual Conference, the 2013 AREUEA International Meetings, the 2014 Israel Real Estate and Urban Economics Symposium, Dublin City University, Federal Reserve Bank of San Francisco, University College Dublin, Tel Aviv University, Xiamen University, and the Hebrew University of Jerusalem as well as David Aboody, Tom Conlon, Jason Chang, Tom Davidoff, John Duca, Fernando Ferreira, Liam Gallagher, Mark Garmaise, Mark Grinblatt, Francis Longstaff, Stijn Van Nieuwerburgh, Steve Oliner, Amiyatosh Purnanandam, Chester Spatt, Avanidhar Subrahmanyam and Robert Shiller for helpful comments. We are particularly grateful for the advice and suggestions from two anonymous referees and from Andrew Karolyi, the Executive Editor of this Journal.
Group:Social Science Working Papers
Funding AgencyGrant Number
Science Foundation, Ireland08/SRC/FM1389
Subject Keywords:integration, housing risk diversification, housing returns
Series Name:Social Science Working Paper
Issue or Number:1398
Classification Code:JEL: G10, G11, G12, G14, R12, R21
Record Number:CaltechAUTHORS:20170726-112029656
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:79413
Deposited By: Hanna Storlie
Deposited On:07 Aug 2017 21:30
Last Modified:03 Oct 2019 18:19

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