Conventional wisdom holds that one of the riskiest aspects of owning a house is the uncertainty surrounding its sale price, especially if one moves to another housing market. We show instead that for many households, home owning hedges their net exposure to housing market risk,because the sale price is expected to positively covary with house prices in the likely new markets. That expected covariance is much higher than previously realized because there is considerable heterogeneity across city pairs in how much house prices covary and households tend to move between highly correlated housing markets. Taking these two considerations into account increases the estimated median expected correlation in real house price growth across MSAs from 0.35 to 0.60. Moreover, we show that households’ tenure decisions (whether to own or rent) are sensitive to this “moving-hedge” value. We find that the likelihood of home owning for a mobile household is more than one percentage point higher when the effective covariance between markets rises by 38 percent (one standard deviation). This effect attenuates as a household’s probability of moving diminishes and thus the hedging value declines.
Joint paper with Nicholas S. Souleles (Wharton School – University of Pennsylvania), March 2009.