Frothy Housing Markets and Local Stock-Price Movements

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Abstract

Prior empirical research finds habitat effects manifest in stock pricing among firms that share headquarters cities. We empirically investigate whether trends in residential real estate prices affect headquarters-city stock pricing phenomena for companies across U.S. metro areas for 1989–2004. Specifically, we hypothesize that stocks of firms headquartered in ‘hot’ residential real estate markets experience higher returns compared to stocks of firms from ‘cold’ markets. We also hypothesize that stocks of firms headquartered in hot real estate markets display stronger return comovement with same-city stocks. We find support for these hypotheses during the 1999–2004 sample period which coincides with the start of the housing bubble of the 2000 s; we find mixed results in earlier periods. Our findings indicate that city-specific home price patterns conditionally affect stock pricing of local firms, suggesting that investor behavior is influenced by localized shocks to household real estate wealth.

Keywords

Residential real estate Wealth effects Return comovement Headquarters city effect Household finance 
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Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  1. 1.The School of BusinessUniversity of KansasLawrenceUSA
  2. 2.College of BusinessEast Carolina UniversityGreenvilleUSA

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