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Momentum in Residential Real Estate

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Abstract

This paper examines whether there is return momentum in residential real estate in the U.S. Case and Shiller (American economic review 79(1):128–137, 1989) document evidence of positive return correlation in four U.S. cities. Similar to Jegadeesh and Titman’s (Journal of finance 56:699–720, 1993) stock market momentum paper, we construct long-short zero cost investment portfolios from more than 380 metropolitan areas based on their lagged returns. Our results show that momentum of returns in the U.S. residential housing is statistically significant and economically meaningful during our 1983 to 2008 sample period. On average, zero cost investment portfolios that buy past winning housing markets and short sell past losing markets earn up to 8.92% annually. Our results are robust to different sub-periods and more pronounced in the Northeast and West regions. While zero cost portfolios of residential real estate indices is not a tradable strategy, the implications of our results can be useful for builders, potential home owners, mortgage originators and traders of real estate options.

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Notes

  1. For example, a builder may alter the decision of when and where to build based on area-specific momentum information and the projected delivery time of the structure. Similarly, potential home buyers may choose to delay their purchase if they have sufficient information that negative momentum exists in their area.

  2. Mortgage lenders can use momentum information on housing to better estimate the future value of their collateral.

  3. See data section for more detail about the FHFA housing indices.

  4. The OFHEO index data are available at http://www.fhfa.gov.

  5. For more detail about the index construction see Calhoun (1996) and OFHEO’s website at http://www.fhfa.gov

  6. www.census.gov/geo/www/us_regdiv.pdf provides detailed region classification at the state level.

  7. The specification suggested by the AIC is an AR model with five lags.

  8. Results of the full sample Arellano-Bond estimation are similar to our autoregression results. We do not include the results for brevity, and they are available upon request.

  9. The results from the full sample Arellano-Bond dynamic GMM estimation are very similar to the results in Table 2 in both significance and magnitude.

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Authors and Affiliations

  1. Department of Finance, College of Business, East Carolina University, Bate 3129, Greenville, NC, 27858, USA

    Eli Beracha

  2. Department of Economics and Finance, University of Wyoming, 3985, 1000 E. University Ave., Laramie, WY, 82071, USA

    Hilla Skiba

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  1. Eli Beracha
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  2. Hilla Skiba
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Correspondence to Hilla Skiba.

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Beracha, E., Skiba, H. Momentum in Residential Real Estate. J Real Estate Finan Econ 43, 299–320 (2011). https://doi.org/10.1007/s11146-009-9210-2

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