Authors: Liang Peng and Thomas G. Thibodeau
Idiosyncratic risk in house prices is important to homeowners as it directly affects uncertainty in home value appreciation. This paper empirically examines whether this risk is systematically related to the level of house price, household income, and contemporaneous average home value appreciation of the neighborhood (delineated with zip codes), using 26.5 million transactions of single-family homes sold between 1996:Q1 and 2012:Q3 in 7,862 zip codes across the US. For each neighborhood, we fit the same hedonic model to home sales in each of three separate time periods: (1) when US house prices were essentially constant in real terms; (2) during the recent housing boom; and (3) during the recent housing bust, and then use the standard deviation of the residuals to measure the house price risk. We find that U-shape relationships between house price risk and home values, and between house price risk and household income in all three periods. The risk is relatively high in both low- and high-income neighborhoods; is relatively high in both low- and high-home value neighborhoods. Further, we find that house price risk increased during the housing bust for low-income neighborhoods; and that the relationship between cross-sectional house price risk and house price appreciation varies across income groups and over time.