Owner occupied housing as a hedge against rent risk

The conventional wisdom that homeownership is very risky ignores the fact that the alternative, renting, is also risky. Owning a house provides a hedge against fluctuations in housing costs, but in turn introduces asset price risk. In a simple model of tenure choice with endogenous house prices, we show that the net risk of owning declines with a household’s expected horizon in its house and with the correlation in housing costs in future locations. Empirically, we find that both house prices, relative to rents, and the probability of homeownership increase with net rent risk. Economists typically treat houses like standard financial assets. This leads to the conventional view that owning a house is quite risky. Since house prices are volatile and homeowners on average allocate 27 percent of their net worth to their house [Poterba and Samwick 1997], fluctuations in house prices can have a sizable effect on homeowners ’ balance sheets. Further, prior studies have emphasized that changes in housing wealt