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The Journal of Real Estate Finance and Economics

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01-02-2018

Housing “Beta”: Common Risk Factor in Returns of Stocks

Authors: Vishaal Baulkaran, Pawan Jain, Mark Sunderman

Published in: The Journal of Real Estate Finance and Economics | Issue 3/2019

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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.

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See Kullmann (2003).

They used the Office of Federal Housing Enterprise Oversight home price indices for all U.S metropolitan areas.

https://us.spindices.com/indices/real-estate/sp-corelogic-case-shiller-20-city-composite-home-price-nsa-index

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.

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Title: Housing “Beta”: Common Risk Factor in Returns of Stocks
Authors: Vishaal Baulkaran
Pawan Jain
Mark Sunderman
Publication date: 01-02-2018
Publisher: Springer US
Published in: The Journal of Real Estate Finance and Economics / Issue 3/2019
Print ISSN: 0895-5638
Electronic ISSN: 1573-045X
DOI: https://doi.org/10.1007/s11146-018-9656-1

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