Research Summary
Research Summary
Systematic Risk in the Housing Markets
Description
A one-factor pricing model is employed to investigate the internal consistency of single family home and professionally-managed property prices during 1986-2006. The risk fac-tor used here is the US real estate index, which has much stronger explanatory power than the S&P 500 index for real estate assets. Empirical tests with this model lead to sev-eral surprising results. First, portfolios of East Coast or West Coast cities have negative risk-adjusted returns (alpha), while a portfolio of all inland cities has positive alpha. Sec-ond, a momentum strategy does not outperform the US real estate index on a transaction and risk-adjusted basis, despite its ability to pick the largest-growth cities. Third, high-beta cities have negative alpha, while low-beta cities have positive alpha, even after con-sidering transactions costs. Fourth, high rental yield cities have positive alpha and vice-versa, even after transaction costs. Fifth, large cities have negative alpha, while small cit-ies have positive alpha. Sixth, expensive cities have negative alpha and vice-versa. A possible explanation for these abnormal returns is that some cities are systematically ne-glected by investors.