Neighborhood Externality Risk and The Home Ownership Status of Properties

Christian Hilber

Zell/Lurie Center Working Papers from Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania

Abstract: In contrast to corporate and institutional investors with larger asset portfolios, single owner-occupiers cannot adequately diversify real estate risk. They therefore pay a risk premium that increases with the corresponding risk. Ceteris paribus, homeownership should be relatively less attractive in places with higher real estate risk. Using the American Housing Survey, it is documented that neighborhood externality risk, a major component of real estate risk, substantially reduces the probability that a housing unit is owner-occupied, having controlled for MSA-level and center city unobservable characteristics. Depending on the type of externality, model specification and sample used, a decrease of one specific risk variable by one standard deviation increases the probability that a unit is owner-occupied between 1.5 and 12.3 percent. An analysis of units that change their homeownership status suggests that this effect may be causal.

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Related works:
Journal Article: Neighborhood externality risk and the homeownership status of properties (2005)
Working Paper: Neighborhood externality risk and the homeownership status of properties (2003)
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