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The U.S. Housing Market and the Pricing of Risk: Fundamental Analysis and Market Sentiment

Author

Listed:
  • Changha Jin

    (Hanyang University ERICA campus)

  • Gokce Soydemir

    (California State University One University Circle)

  • Alan Tidwell

    (Columbus State University)

Abstract

In this study, we explore the pricing patterns of the U.S. residential real estate market in the context of the recent housing bubble and subsequent deflation. We examine 10 consolidated metropolitan statistical areas and construct excess residential market return per risk measured by standard deviation, a standard Sharpe ratio measure. Then, using an error correction model, we regress excess residential market return per risk on fundamental market risk factors from a range of demand- and supply-side variables together with a non-fundamental based sentiment variable we calculated from the U.S. Conference Board Consumer Sentiment Index. Our long-run findings reveal that in addition to a fundamental-based model documenting pricing to be a function of both demand- and supply-side variables, non-fundamental based (irrational) consumer sentiment is a significant exogenous variable in the pricing pattern of U.S. residential real estate. The applicability of an irrational sentiment component implies that previously unexplained (arguably irrational) behaviors have a strong link to consumer's pricing of residential housing.

Suggested Citation

  • Changha Jin & Gokce Soydemir & Alan Tidwell, 2014. "The U.S. Housing Market and the Pricing of Risk: Fundamental Analysis and Market Sentiment," Journal of Real Estate Research, American Real Estate Society, vol. 36(2), pages 187-220.
    • Handle: RePEc:jre:issued:v:36:n:2:2014:p:187-220
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    Cited by:

    1. Helen X. H. Bao & Steven Haotong Li, 2016. "Overconfidence And Real Estate Research: A Survey Of The Literature," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 61(04), pages 1-24, September.
    2. Zhou, Zhengyi, 2018. "Housing market sentiment and intervention effectiveness: Evidence from China," Emerging Markets Review, Elsevier, vol. 35(C), pages 91-110.
    3. Enwei Zhu & Jing Wu & Hongyu Liu & Keyang Li, 2023. "A Sentiment Index of the Housing Market in China: Text Mining of Narratives on Social Media," The Journal of Real Estate Finance and Economics, Springer, vol. 66(1), pages 77-118, January.
    4. Zheng, Yao & Osmer, Eric, 2021. "Housing price dynamics: The impact of stock market sentiment and the spillover effect," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 854-867.
    5. Shulin Shen & Yiyi Zhao & Jindong Pang, 2024. "Local Housing Market Sentiments and Returns: Evidence from China," The Journal of Real Estate Finance and Economics, Springer, vol. 68(3), pages 488-522, April.
    6. Sergiy Saydometov & Sanjiv Sabherwal & Ramya Rajajagadeesan Aroul, 2020. "Sentiment and its asymmetric effect on housing returns," Review of Financial Economics, John Wiley & Sons, vol. 38(4), pages 580-600, October.

    More about this item

    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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