Date Added: Oct 2009
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. However, households who sell a house typically buy another house, whose purchase price is also uncertain. The authors show that for such households, home owning often hedges their net exposure to housing market risk, because their sale price covaries positively with house prices in their likely new market. That expected covariance is much higher than previously recognized because there is considerable heterogeneity across city pairs in how much house prices covary and households tend to move between the highly correlated housing markets.