Home Price Risk, Local Market Shocks, and Index Hedging

Home Price Risk, Local Market Shocks, and Index Hedging All real estate markets are local, or so the conventional wisdom goes. But just how local is local? I address this question empirically using over 75,000 repeat-sales transactions from a large suburban county of Washington D.C.. I construct and evaluate a variety of local home price indices defined by geography, price, and home type. I also calculate “house-specific” indices using locally weighted regressions with maximized kernel bandwidths. On the whole, local indices add a moderate amount of explanatory power relative to metropolitan indices. In my sample, the metropolitan index explains 50–75% of the variation in home price shocks, and local indices add 3–7% more. In an index hedging framework, homeowners should be willing to pay 5–10% to hedge with a local index versus a metropolitan index alone. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Real Estate Finance and Economics Springer Journals

Home Price Risk, Local Market Shocks, and Index Hedging

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Springer US
Copyright © 2010 by Springer Science+Business Media, LLC
Economics; Regional/Spatial Science; Financial Services
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