Quantitative Economics: Nov, 2014, Volume 5, Issue 3

Do households use home-ownership to insure themselves? Evidence across U.S. cities

Michael Amior, Jonathan Halket

Are households more likely to be homeowners when “housing risk” is higher? We
show that home-ownership rates and loan-to-value (LTV) ratios at the city level
are strongly negatively correlated with local house price volatility.However, causal
inference is confounded by house price levels, which are systematically correlated
with housing risk in an intuitive way: in cities where the land value is larger relative
to the local cost of structures, house prices are higher and more volatile. We
disentangle the contributions of high price levels from high volatilities by building
a life-cycle model of home-ownership choices.We find that higher price levels
can explain most of the lower home-ownership. Higher risk in the model leads to
slightly lower home-ownership and LTV ratios in high land value cities. The relationship
between LTV and risk is corroborated by LTV’s negative correlation with
price volatility in the data and highlights the importance of including other means
of incomplete insurance in models of home-ownership.
Keywords. Home-ownership, housing risk, land share, loan-to-value, life-cycle.
JEL classification. D91, E21, R21, R31.

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