Academic Tenure, Income Uncertainty, and Real Estate Risk-Taking

Abstract

While real estate investment via home ownership is inherently risky for all owners, individual households face varying degrees of risk that may affect the decision to rent versus own. The uncertainty of future cash flows to an enterprise or household is likely to influence investment behavior in large, long-lived capital such as real estate. This study uses a unique data set of university professors to estimate risk preference sensitivity to changes in the degree of uncertainty of labor income. A structural modeling econometric approach indicates that nontenured professors, who have the least secure incomes, are 33% less likely to own a home than their tenured colleagues, despite having similar average incomes. For those with tenure, 38% of their home ownership can be explained by academic tenure. Our calculations indicate that 124,729 tenured professors decided to purchase a home solely because of the job security tenure entails: roughly .2% of the total U.S. national housing stock.