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The Journal of Real Estate Finance and Economics

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04-01-2022

Housing Risk and Returns in Submarkets with Spatial Dependence and Heterogeneity

Authors: P. S. Morawakage, G. Earl, B. Liu, E. Roca, A. Omura

Published in: The Journal of Real Estate Finance and Economics | Issue 4/2023

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Abstract

Employing a recently developed panel econometric technique, first, we show that accounting for spatial dependence and heterogeneity yields more accurate risk factor coefficients and abnormal housing returns. Rather than systematic risks, idiosyncratic risks explain the variations in residential housing excess returns. After controlling for asset-specific and systematic risk factors, the positive and significant impact of the unobservable common factors on the excess returns suggests that speculative market forces drive the housing excess returns. Second, we then analyze the risks and returns of houses in affordable and expensive submarkets allowing for spatial dependence and heterogeneity. We find that houses in the affordable submarkets perform better than houses in the expensive submarkets. Thus, the potential demand for houses in the affordable submarket may aggravate the housing affordability crisis. Our study’s results, therefore, encourage policymakers and investors to view the housing market as a collection of regional units and submarkets, but not as a single national market.

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Title: Housing Risk and Returns in Submarkets with Spatial Dependence and Heterogeneity
Authors: P. S. Morawakage
G. Earl
B. Liu
E. Roca
A. Omura
Publication date: 04-01-2022
Publisher: Springer US
Published in: The Journal of Real Estate Finance and Economics / Issue 4/2023
Print ISSN: 0895-5638
Electronic ISSN: 1573-045X
DOI: https://doi.org/10.1007/s11146-021-09877-7

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