Housing, Consumption, and Asset Pricing

Abstract

This paper considers a consumption-based asset pricing model where housing is explicitly modeled both as an asset and as a consumption good. Nonseparable preferences describe households' concern with composition risk, that is, fluctuations in the relative share of housing in their consumption basket. Since the housing share moves slowly, a concern with composition risk induces low frequency movements in stock prices that are not driven by news about cash flow. Moreover, the model predicts that the housing share can be used to forecast excess returns on stocks. We document that this indeed true in the data. The presence of composition risk also implies that the riskless rate is low which further helps the model improve on the standard CCAPM.

House Price Dynamics: Fundamentals and Expectations

“…Replacing the expectation in (7) and applying the de…nitional relation for z t the solution 24 for the extrapolative model with …xed extrapolation coe¢ cient is:…”

“…This is "because the (atomistic) representative agent fails to internalize the in ‡uence of his own forecast on the equilibrium law of motion of the forecast variable", page 318. 24 The solution of this model in the case of iid dividend growth rate is provided in Lansing (2006); the model considered in this section is a straightforward modi…cation to accomodate for time dependence in the rent growth rate. 12 composite variable z t in the following fashion:…”

Housing Services and Volatility Bounds with Real Estate Returns

“…Section (2) characterizes in some detail the equity premium puzzle and volatility bounds and provides a brief update on the current status quo with respect to established research results. Section (3) uses the model and extended data from Piazzesi, et al (2007) to show that SDF from this model an be sufficiently volatile to satisfy Hansen-Jagannathan bounds. Section (4) discusses robustness of the results and issues for future research.…”

“…A natural choice for a model to be tested is one that explicitly treats housing both as a consumption good and as an asset. We use the model from Piazzesi, Schneider, and Tuzel (2007). We extend and re-construct the dataset employed in Piazzesi, et.…”

“…Our returns include real estate returns in addition to the typically included returns on stocks and a risk-free asset. Then we calculate moments of a stochastic discount factor implied by the model from Piazzesi, Schneider, and Tuzel (2007). These moments are shown to be above the Hansen-Jagannathan volatility bounds.…”