Abstract
This study proposes the housing “beta” and tests whether the housing “beta” is a significant determinant for stock returns in a multifactor framework. We hypothesize that the housing market is a systematic risk factor given the impact of the housing market on the overall economy and economic growth of most countries, as well as the effect of homes in the overall wealth of individual investors. The housing market directly affect GDP growth through residential fixed investment and housing services. In addition, the housing market indirectly impacts economic activities via consumption. Our results show that the housing “beta” is positive and significant in explaining stock returns after controlling several other factors from the prior literature. This relationship is stronger, as expected, during the financial crisis period. We conducted several robustness checks using a different study period and housing market indices and obtain results which are consistent with our main findings.
Similar content being viewed by others
Notes
See Kullmann (2003).
They used the Office of Federal Housing Enterprise Oversight home price indices for all U.S metropolitan areas.
In column IV, the post-crisis coefficient is not significant. Liquidity could potentially be driving this result. Based on recommendations from the reviewer, we re-estimated the model without liquidity and the coefficient on housing market returns becomes positive. However, it is still not significant (we thank the referee for suggesting this). Potentially liquidity is partially explaining the findings but based on Case-Shiller index it seems the housing market continued to decline until February 2012 and then started correcting. This potentially has an impact on the estimated coefficient for the post-crisis period.
Residential Fixed Investment (RFI) consists of home building, multifamily development and remodelling, production of manufactured home and brokers’ fees. Housing services includes gross rents paid by renters, owners’ imputed rent and utility payments.
We thank the referee for suggesting that we explore the theoretical mechanism that is driving the link between housing market returns and large vs. small capatilzation stocks.
We have to caution the interpretation of the results on supply elasticity since our data on city-sub index began in 2007.
References
Asness, C. S., Moskowitz, T. J., & Pedersen, L. H. (2013). Value and momentum everywhere. Journal of Finance, 68(3), 929–985. https://doi.org/10.1111/jofi.12021
Ball, M., & Wood, A. (1999). Housing investment: Long run international trends and volatility. Housing Studies, 14(2), 185–209. https://doi.org/10.1080/02673039982911
Barberis, N., Shleifer, A., & Vishny, R. (1998). A model of investor sentiment. Journal of Financial Economics, 49(3), 307–343. https://doi.org/10.1016/S0304-405X(98)00027-0
Barroso, P., & Santa-Clara, P. (2015). Momentum has its moments. Journal of Financial Economics, 116(1), 111–120. https://doi.org/10.1016/j.jfineco.2014.11.010
Belsky, E., & Prakken, J. (2004). Housing wealth effects: housing’s impact on wealth accumulation, wealth distribution and consumer spending, Harvard University. Working Paper, National Center for real estate research report W04-13.
Bostic, R., Gabriel, S., & Painter, G. (2009). Housing wealth, financial wealth and consumption: New evidence from micro data. Regional Science and Urban Economics, 39(1), 79–89. https://doi.org/10.1016/j.regsciurbeco.2008.06.002
Brunnermeier, M. K., & Pedersen, L. H. (2009). Funding liquidity and market liquidity. Review of Financial Studies, 22(6), 2201–2238. https://doi.org/10.1093/rfs/hhn098
Campbell, J. Y., & Cocco, J. F. (2007). How do house price affect consumption? Evidence from micro data. Journal of Monetary Economics, 54(3), 591–621. https://doi.org/10.1016/j.jmoneco.2005.10.016
Case, K. E., & Shiller, R. J. (2003). Is there a bubble in the housing market? Brookings Papers on Economic Activity, 2003(2), 299–342. https://doi.org/10.1353/eca.2004.0004
Case, K. E., Quigley, J. M., & Shiller, R. J. (2005). Comparing wealth effects: The stock market versus housing market. Advances in Macroeconomics, 5, no. 1, article 1.
Case, K., Cotter, J., & Gabriel, S. (2011). Housing risk and return: Evidence from a housing asset-pricing model. The Journal of Portfolio Management, 37(5), 89–109. https://doi.org/10.3905/jpm.2011.37.5.089
Chu, Y. (2010). An intertemporal capital asset pricing model with owner-occupied housing. Journal of Finance Economics, 38(3), 427–465.
Clayton, J., & MacKinnon, G. (2001). The time-varying nature of the link between REIT, real estate and financial asset returns. Journal of Real Estate Portfolio Management, 7(1), 43–54.
Cocco, J. (2005). Portfolio choice in the presence housing. Review of Financial Studies, 18(2), 535–567. https://doi.org/10.1093/rfs/hhi006
Conover, M., Friday, H. S., & Sirman, S. (2002). Diversification benefits from foreign real estate investments. Journal of Real Estate Portfolio Management, 8(1), 17–25.
Duggala, R., & Millarb, J. A. (1999). Institutional ownership and firm performance: The case of bidder returns. Journal of Corporate Finance, 5(2), 103–117. https://doi.org/10.1016/S0929-1199(98)00018-2
Eichholtz, P. M. (1996). Does international diversification work better for real estate than for stocks and bonds? Financial Analysts Journal, 52(1), 56–62. https://doi.org/10.2469/faj.v52.n1.1967
Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33(1), 3–56. https://doi.org/10.1016/0304-405X(93)90023-5
Fama, E. F., & MacBeth, J. D. (1973). Risk, return, and equilibrium: Empirical tests. Journal of Political Economy, 81(3), 607–636. https://doi.org/10.1086/260061
Flavin, M., & Nakagawa, S. (2008). A model of housing in the presence of adjustment costs: A structural interpretation of habit persistence. American Economic Review, 98(1), 474–495. https://doi.org/10.1257/aer.98.1.474
Flavin, M., & Yamashita, T. (2002). Owner-occupied housing and the composition of the household portfolio. American Economic Review, 92(1), 345–362. https://doi.org/10.1257/000282802760015775
Froot, K. A. (1995). Hedging portfolios with real assets. The Journal of Portfolio Management, 21(4), 60–77. https://doi.org/10.3905/jpm.1995.409527
Gan, J. (2010). Housing wealth and consumption growth: Evidence from a large panel of household. Review of Financial Studies, 23(6), 2229–2267. https://doi.org/10.1093/rfs/hhp127
Giliberto, S. M. (1993). Measuring real estate returns: The hedged REIT index. The Journal of Portfolio Management, 19(3), 94–99. https://doi.org/10.3905/jpm.1993.409443
Glaeser, E. L., Gyourko, J., & Saiz, A. (2008). Housing supply and housing bubbles. Journal of Urban Economics, 64(2), 198–217. https://doi.org/10.1016/j.jue.2008.07.007
Goetzmann, W. N., & Ibbotson, R. G. (1990). The performance of real estate as an asset class. Journal of Applied Corporate Finance, 3(1), 65–76. https://doi.org/10.1111/j.1745-6622.1990.tb00196.x
Green, R. K., Malpezzi, S., & Mayo, S. K. (2005). Metropolitan-specific estimates of the price elasticity of supply of housing and their sources. American Economic Review, 95(2), 334–339. https://doi.org/10.1257/000282805774670077
Greenspan, A., & Kennedy, J. (2005). Estimates of home mortgage originations, repayment and debt on one-to-four family residences. In Finance and Economics Discussion Series 2005–41. Washington D.C: Board of Governors of the Federal Reserve System. https://doi.org/10.2139/ssrn.874821
Grissom, T. V., Kuhle, J. L., & Walther, C. H. (1987). Diversification works in real estate, too. The Journal of Portfolio Management, 13(2), 66–71. https://doi.org/10.3905/jpm.1987.409095
Hudson-Wilson, S., & Elbaum, B. L. (1995). Diversification benefits for investors in real estate. The Journal of Portfolio Management, 21(3), 92–99. https://doi.org/10.3905/jpm.1995.409517
Hurst, E., & Stafford, F. (2004). Home is where the equity is: Mortgage refinancing and household consumption. Journal of Money, Credit and Banking, 36(6), 985–1014.
Hurst, E., Luoh, M. C., & Stafford, F. (1998). Wealth dynamics of American families, 1984-1994. Brookings Papers on Economic Activity, 98, 267–338.
Ibbotson, R. G., & Siegel, L. B. (1984). Real estate returns: A comparison with other investments. AREUEA Journal, 12(3), 219–242. https://doi.org/10.1111/1540-6229.00320
Igan, D., & Loungani, P. (2010). Dismal prospects for the real estate sector. IMF World Economic Outlook (October), Box, 1.
Jain, P., Sunderman, M., & Westby-Gibson, K. J. (2017). REITs and market microstructure: A comprehensive analysis of market quality. Journal of Real Estate Research, 39(1), 65–98.
Juster, T., Lupton, J., Smith, J., & Stafford, F. (2006). The decline in household savings and the wealth effect. The Review of Economics and Statistics, 88(1), 20–27.
Kiyotaki, N., & Moore, J. (1997). Credit chains. Journal of Political Economy, 105(21), 211–248. https://doi.org/10.1086/262072
Kuhle, J. L. (1987). Portfolio diversification and return benefits--common stock vs. real estate investment trusts (REITs). Journal of Real Estate Research, 2(2), 1–9.
Kullmann, C. (2003). Real estate and its role in asset pricing. Working Paper: University of British Columbia.
Lang, S., & Scholz, A. (2015). The diverging role of the systematic risk factors: Evidence from real estate stock markets. Journal of Property Investment & Finance, 33(1), 81–106. https://doi.org/10.1108/JPIF-05-2014-0032
Liu, C. H., Hartzell, D. J., Greig, W., & Grissom, T. V. (1990). The integration of the real estate market and the stock market: Some preliminary evidence. Journal of Real Estate Finance and Economics, 3(3), 261–282.
Luchtenberg, K. F., & Seiler, M. J. (2014). Did the recent financial crisis impact integration between the real estate and stock markets? Journal of Real Estate Portfolio Management, 20(1), 1–20.
Moscore, F., Tosetti, E., & Canepa, A. (2014). Real estate market and financial stability in US metropolitan areas: A dynamic model with spatial effects. Regional Science and Urban Economics, 49, 129–146. https://doi.org/10.1016/j.regsciurbeco.2014.08.003
Novy-Marx, R. (2013). The other side of value: The gross profitability premium. Journal of Financial Economics, 108(1), 1–28. https://doi.org/10.1016/j.jfineco.2013.01.003
Pastor, L., & Stambaugh, R. F. (2003). Liquidity risk and expected stock returns. The Journal of Political Economy, 111(3), 642–685. https://doi.org/10.1086/374184
Pedersen, L. H. (2009). When everyone runs for the exit. National Bureau of Economic Research: Working paper.
Peterson, J. D., & Hsieh, C. H. (1997). Do common risk factors in the returns on stocks and bonds explain returns on REITs. Real Estate Economics, 25(2), 321–345. https://doi.org/10.1111/1540-6229.00717
Piazzesi, M., Schneider, M., & Tuzel, S. (2007). Housing, consumption and asset pricing. Journal of Financial Economics, 83(3), 531–569. https://doi.org/10.1016/j.jfineco.2006.01.006
Saiz, A. (2010). The geographic determinants of housing supply. The Quarterly Journal of Economics, 125(3), 1253–1296. https://doi.org/10.1162/qjec.2010.125.3.1253
Scholz, A., Lang, S., & Schaefers, W. (2014). Liquidity and real estate asset pricing: A pan-European study. Journal of European Real Estate Research, 7(1), 59–86. https://doi.org/10.1108/JERER-06-2013-0009
Serrano, C., & Hoesli, M. (2007). Forecasting EREIT returns. Journal of Real Estate Portfolio Management, 13(4), 293–309.
Vayanos, D., & Woolley, P. (2012). A theoretical analysis of momentum and value strategies. Working paper.
Voicu, C., & Seiler, M. J. (2009). Understanding systematic risk in real estate markets. Journal of Housing Research, 22(2), 165–201.
Voicu, C., & Seiler, M. J. (2013). Deriving optimal portfolios for hedging housing risk. The Journal of Real Estate Finance and Economics, 46(3), 379–396. https://doi.org/10.1007/s11146-011-9328-x
Webb, J. R., & Rubens, J. H. (1987). How much in real estate? A surprising answer. The Journal of Portfolio Management, 13(3), 10–14. https://doi.org/10.3905/jpm.1987.10
Yao, R., & Zhang, H. (2005). Optimal consumption and portfolio choices with risky housing and borrowing constraints. Review of Financial Studies, 18(1), 595–633.
Author information
Authors and Affiliations
Corresponding author
Appendix 1
Appendix 1
Rights and permissions
About this article
Cite this article
Baulkaran, V., Jain, P. & Sunderman, M. Housing “Beta”: Common Risk Factor in Returns of Stocks. J Real Estate Finan Econ 58, 438–456 (2019). https://doi.org/10.1007/s11146-018-9656-1
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11146-018-9656-1