Labor Income, Housing Prices and Homeownership

For most US households, labor income is the most important source of wealth and housing is the most important risky asset. A natural intuition is thus that households whose incomes covary relatively strongly with housing prices should own relatively little housing. Under plausible assumptions on preferences and distributions, this result holds theoretically. Empirically, I find a significant effect: among US households, a one standard deviation increase in income-house price covariance is associated with a decrease of approximately $7,500 in the value of owner occupied housing. This empirical result implies greater cognizance of the interaction between labor income and asset risk on the part of some households than suggested by most analyses of stock market behavior. The analysis also suggests that many homeowners enter financial markets in a riskier position than typically thought. The results bolster the intuitive appeal of proposals for market- or tax-based risk sharing in housing prices