The Composition of Metropolitan Employment and the Correlation of Housing Prices Across Metropolitan Areas

Christian L. Redfearn

No 8641, Working Paper from USC Lusk Center for Real Estate

Abstract: "The variation in default rates by region is quite substantial. Default rates in theNorthcentral states were about ve times as large as default rates in the Southeasternstates. These di erences reflect the credit rate risk associated with the real estatemarkets in each of the regions, the fortunes of the regional economies, and the loan-to-value ratios and ages of the mortgages."- Quigley and Van Order (1991), p. 358, italics added"The pattern of covariances in these returns suggests that portfolio risk can be reducedby geographical diversi cation . . . "- Quigley and Van Order (1991), p. 361Implicit in this argument is an assumption that the fundamentals that generate returnsto housing are not perfectly correlated across space. However, if metropolitan areas areviewed as small open economies, they will share shocks to the prices of common inportsand exports|shocks that may spill over to housing markets. This paper demonstratesthat the correlation of returns to residential housing between two metropolitan areasis a function not only of their physical proximitiy but also the similarity of their indus-trial composition. This implies that as local economies evolve so will the covarianceof housing returns|suggesting that the bene ts derived from diversi cation are maxi-mized by considering the industry risk inherent in the current metropolitan areas, notjust the correlation of past returns.

Keywords: Housing Prices; Metropolitan areas; Employment; Loan Defaults (search for similar items in EconPapers)
Date: 2000
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