Year Published
2000
Abstract
"The variation in default rates by region is quite substantial. Default rates in the
Northcentral states were about ve times as large as default rates in the Southeastern
states. These di erences reflect the credit rate risk associated with the real estate
markets in each of the regions, the fortunes of the regional economies, and the loan-to-
value ratios and ages of the mortgages."
- Quigley and Van Order (1991), p. 358, italics added
"The pattern of covariances in these returns suggests that portfolio risk can be reduced
by geographical diversi cation . . . "
- Quigley and Van Order (1991), p. 361
Implicit in this argument is an assumption that the fundamentals that generate returns
to housing are not perfectly correlated across space. However, if metropolitan areas are
viewed as small open economies, they will share shocks to the prices of common inports
and exports|shocks that may spill over to housing markets. This paper demonstrates
that the correlation of returns to residential housing between two metropolitan areas
is a function not only of their physical proximitiy but also the similarity of their indus-
trial composition. This implies that as local economies evolve so will the covariance
of housing returns|suggesting that the bene ts derived from diversi cation are maxi-
mized by considering the industry risk inherent in the current metropolitan areas, not
just the correlation of past returns.
Northcentral states were about ve times as large as default rates in the Southeastern
states. These di erences reflect the credit rate risk associated with the real estate
markets in each of the regions, the fortunes of the regional economies, and the loan-to-
value ratios and ages of the mortgages."
- Quigley and Van Order (1991), p. 358, italics added
"The pattern of covariances in these returns suggests that portfolio risk can be reduced
by geographical diversi cation . . . "
- Quigley and Van Order (1991), p. 361
Implicit in this argument is an assumption that the fundamentals that generate returns
to housing are not perfectly correlated across space. However, if metropolitan areas are
viewed as small open economies, they will share shocks to the prices of common inports
and exports|shocks that may spill over to housing markets. This paper demonstrates
that the correlation of returns to residential housing between two metropolitan areas
is a function not only of their physical proximitiy but also the similarity of their indus-
trial composition. This implies that as local economies evolve so will the covariance
of housing returns|suggesting that the bene ts derived from diversi cation are maxi-
mized by considering the industry risk inherent in the current metropolitan areas, not
just the correlation of past returns.
Research Category