Cristian Voicu

Systematic Risk in the Housing Markets Cristian Voicu

In the first chapter, a one-factor pricing model isemployed to investigate the total returns ofsingle-family homes and professionally-managedproperties. Portfolios of East and West Coast citieshave negative risk-adjusted returns, while aportfolio of all inland cities has positive alpha. Positive alpha can be achieved with portfolios ofhigh rental yield cities, small cities, low medianprice cities, or low beta cities, while the oppositestrategies generate negative alpha. A possibleexplanation for these abnormal returns is that somecities are systematically neglected by investors. In the second chapter, I explore the optimal way inwhich housing derivatives should be used to mitigatehousing risk. Households should hedge housing both asinvestment and as consumption. Housing investmentrisk is hedged by selling housing futures amountingto the full value of the home. Housing consumptionrisk is hedged by buying housing futures in each citywhere the household might move. The size of thehedges depends on the probability of moving and onhome values in each city. This framework can also beused to simplify the rent versus buy decision.