Evidence on the Determinants and Variation of Idiosyncratic Risk in Housing Markets

Using around one million repeat sales, we show that idiosyncratic risk in real house price appreciation varies considerably across houses. We find that idiosyncratic risk is timevarying, depends negatively on the initial house price, varies across locations, and reduces as the holding period of the house increases. We find that risk is priced in expected returns across all these dimensions, except location. The variation in idiosyncratic risk by location can be explained by variations in market thinness and information quality across markets. Risk is related to macroeconomic credit conditions and financial regulation. The higher risk for cheaper houses is associated with valuation uncertainty and financial vulnerability of homeowners. The risk-return relationship across initial house prices depends on the current state of the market. During busts of the housing cycle, the distribution of house prices widens and cheaper houses depreciate faster than more expensive houses, leading to an inverted riskreturn relationship.