New sources of housing market risk: Asset pricing for the US state‐level housing markets

Abstract

AbstractThis study develops three novel housing risk factors to explore the sources of risk in US state‐level housing markets. The asset‐pricing models enrich our investigations into housing markets from three perspectives: housing boom–bust, volatile–calm, and factors’ time‐varying impact regimes. The findings indicate that state‐level housing returns all show significant exposure to systemic risk of housing markets, but the demographic and economic factors’ explanatory powers for housing returns differ across markets. Although the liquidity factor is significant under all three frameworks, the inventory and credit factors show significant impacts only in the impact‐switching specification. There are differences in the responses of housing returns to various risk factors and shifts in housing regimes across state housing markets, depending on whether the states exhibited housing bubbles. The results suggest that an effective housing stabilization mechanism must be capable of tracking shifts in the relations between housing markets and risk factors.