Risk and Return within the Single-Family Housing Market

The trade‐off between risk and return in equity markets is well established. This paper examines the existence of the same trade‐off in the single‐family housing market. That market is dominated by homeowners, who constitute about two‐thirds of U.S. households. For them the choice about how much housing and what house to buy is a joint consumption‐investment decision. Furthermore, owner‐occupied housing is by nature a lumpy investment whose risk cannot be completely diversified. Does this consumption‐investment link negate the risk‐return trade‐off within the single‐family housing market? Theory suggests the link still holds. This paper supplies empirical evidence in support of that theoretical result.