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The Journal of Portfolio Management

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Article

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

Karl Case, John Cotter and Stuart Gabriel
The Journal of Portfolio Management Special Real Estate Issue 2011, 37 (5) 89-109; DOI: https://doi.org/10.3905/jpm.2011.37.5.089
Karl Case
is the Hepburn Professor of Economics at Wellesley College in Wellesley, MA. kcase@wellesley.edu
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John Cotter
is an associate professor of finance and the director of the Centre for Financial Markets at the University College Dublin in Dublin, Ireland, and a research fellow in the Ziman Center for Real Estate at the UCLA Anderson School of Management in Los Angeles, CA. john.cotter@ucd.ie
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Stuart Gabriel
is a professor of finance and the Arden Realty Chair in the Anderson School of Management at the University of California, in Los Angeles, CA. stuart.gabriel@anderson.ucla.edu
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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.

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The Journal of Portfolio Management: 37 (5)
The Journal of Portfolio Management
Vol. 37, Issue 5
Special Real Estate Issue 2011
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Housing Risk and Return: Evidence from a Housing
Asset-Pricing Model
Karl Case, John Cotter, Stuart Gabriel
The Journal of Portfolio Management Sep 2011, 37 (5) 89-109; DOI: 10.3905/jpm.2011.37.5.089

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Housing Risk and Return: Evidence from a Housing
Asset-Pricing Model
Karl Case, John Cotter, Stuart Gabriel
The Journal of Portfolio Management Sep 2011, 37 (5) 89-109; DOI: 10.3905/jpm.2011.37.5.089
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  • Article
    • Abstract
    • HOUSING MARKET RETURNS
    • INPUTS TO THE REGRESSIONS
    • ESTIMATING HOUSING MARKET ßS
    • FAMA–MACBETH
    • ROBUSTNESS CHECK
    • CONCLUSIONS
    • APPENDIX
    • ENDNOTES
    • REFERENCES
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