Housing Risk and Return: Evidence from a Housing
Asset-Pricing Model

Abstract

Case, Cotter, and Gabriel investigate the risk–return relationship in the determination of housing asset pricing. In so doing, they evaluate the behavioral hypotheses advanced by Case and Shiller in studies of boom and post-boom housing markets. The authors specify a multifactor housing assetpricing model and evaluate whether the market factor and other measures of risk, including idiosyncratic risk, momentum, and MSA size effects, have explanatory power for metropolitan- specific housing returns. Further, they test the robustness of the asset pricing results to inclusion of controls for socioeconomic variables commonly represented in the house price literature, including changes in employment, affordability, and foreclosure incidence, and find a sizable and statistically significant influence of the market factor on MSA house price returns. Moreover, they show that market betas have varied substantially over time. Results are largely robust to the inclusion of other explanatory variables, including standard measures of risk and other housing market fundamentals. Additional tests of model validity using the Fama–MacBeth framework offer further strong support of a positive risk-and-return relationship in housing. Case, Cotter, and Gabriel’s findings are supportive of the application of a housing investment risk–return framework in explanation of the variation in the metro-area cross section and time series of U.S. house price returns. Further, results strongly corroborate the Case–Shiller survey research, which indicates the importance of speculative forces in the determination of U.S. housing returns.