Volatility in U.S. Housing Sector and the REIT Equity Return

Masud Alam ()
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Masud Alam: Shahjalal University of Science and Technology

The Journal of Real Estate Finance and Economics, 2024, vol. 69, issue 3, No 5, 505-544

Abstract: Abstract This study examines how housing sector volatilities affect real estate investment trust (REIT) equity return in the United States. I argue that unexpected changes in housing variables can be a source of aggregate housing risk, and the first principal component extracted from the volatilities of U.S. housing variables can predict the expected REIT equity returns. I propose and construct a factor-based housing risk index as an additional factor in asset price models that uses the time-varying conditional volatility of housing variables within the U.S. housing sector. The findings show that the proposed housing risk index is economically and theoretically consistent with the risk-return relationship of Merton's conditional Intertemporal Capital Asset Pricing Model (ICAPM) (1973), which predicts an average maximum of 1.83 percent of annual housing risk premium in REIT equity return. Moreover, the housing risk index explains a significant portion of the cross-sectional variation of sectoral REIT returns. In cross-section, the positive risk-return relationship remains significant after controlling for VIX, Fama–French four factors, and a broad set of macroeconomic and financial variables. I also find that the proposed housing beta accurately forecasts U.S. macroeconomic and financial conditions.

Keywords: Housing risk index; REIT equity return; Housing volatility; TGARCH; Intertemporal Capital Asset Pricing Model; Risk-return relation; C51; C53; G11; G17 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11146-022-09897-x

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