Working Paper: NBER ID: w16531
Authors: Andrew Paciorek; Todd M. Sinai
Abstract: We show that the hedging benefit of owning a home reduces the variability of housing consumption after a move. When a current home owner's house price covaries positively with housing costs in a future city, changes in the future cost of housing are offset by commensurate changes in wealth before the move. Using Census micro-data, we find that the cross-sectional variation in house values subsequent to a move is lower for home owners who moved between more highly covarying cities. Our preferred estimates imply that an increase in covariance of one standard deviation reduces the variance of subsequent housing consumption by about 11 percent. Households at the top end of the covariance distribution who are likely to have owned large homes before moving get the largest reductions, of up to 40 percent relative to households at the median.
Keywords: home ownership; housing consumption; covariance; volatility; house prices
JEL Codes: D81; D91; E21; G11; G12; J61; R21; R23; R31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Owning a home (R21) | Variability of housing consumption after a move (R21) |
| Positive covariance of current homeowner's house price with future housing costs (R21) | Changes in future housing costs offset by changes in wealth (G59) |
| Increase in covariance by one standard deviation (C29) | Variance of subsequent housing consumption (D11) |
| High end of the covariance distribution (C46) | Variance of housing consumption relative to median households (D11) |
| Owning larger homes prior to moving (R21) | Hedging effect on variance reduction in housing consumption after relocation (R21) |