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Published March 2015 | public
Journal Article Open

Can Housing Risk Be Diversified? A Cautionary Tale from the Housing Boom and Bust


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 U.S. 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, other macroeconomic factors, including employment and income fundamentals, importantly contributed 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.

Additional Information

© The Author 2014. Published by Oxford University Press on behalf of The Society for Financial Studies. First published online: November 25, 2014. TThe authors gratefully acknowledge research support from the UCLA Ziman Center for Real Estate. John 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 Andrew Karolyi, the Executive Editor of this journal. Supplementary data can be found on The Review of Financial Studies web site.

Attached Files

Supplemental Material - Internet_Appendix_A_CGR_9-18-2014.pdf

Accepted Version - SSRN-id2507899.pdf


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August 20, 2023
August 20, 2023