Spreads and Volatility in House Returns

Peter Chinloy (), Cheng Jiang and Kose John
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Peter Chinloy: Independent Researcher, McLean, VA 22101, USA
Cheng Jiang: Department of Finance, Fox School of Business, Temple University, Philadelphia, PA 19122, USA
Kose John: Department of Finance, Stern School of Business, New York University, New York, NY 10012, USA

JRFM, 2022, vol. 15, issue 8, 1-16

Abstract: Underlying idiosyncratic and illiquidity risks are suppressed in infrequently reported indexes of house prices and rents. Idiosyncratic risks result from bid–ask spreads for prices and rents. Time series autocovariances generate a distribution of prices and rents. Capital gains and rent-price ratios are transforms of these distributions, generating cross-sectional idiosyncratic volatility. Housing data are infrequent and usually made available every month. The monthly–quarterly volatility ratios of house prices and rents and their spreads estimate unobserved daily fluctuations and illiquidity risks. Including idiosyncratic and illiquidity risks, a U.S. house has a standard deviation in returns of 8.7% annually for three decades after 1990. With a mean excess return of 3.7%, the Sharpe ratio of 0.42 is comparable to the S&P 500. Excluding spreads, the house Sharpe ratio is 0.69. House returns respond to liquidity. A 1% increase in volume raises returns by 0.8%.

Keywords: house returns; volatility; bid–ask spreads; idiosyncratic risk; illiquidity (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2022
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