…a homeowner who moves has a cross-location hedging opportunity against sale price risk if he buys a new home at another location. Instead, a homeowner who moves to a rental house may only have been intertemporally hedged against price changes. This paper investigates the quality of both hedging opportunities.
That is from a new paper on the sales price risk of homeownership, and the value of homeownership as a hedging strategy against future price rises. The idea is that if you buy a home today and plan on selling it in the future and buying another home, you are facing two sources of risk: the risk in the uncertainty of the future sale price of the house you’re buying today, and the risk in the uncertainty of the future buying price of your next house. However, if you stay in the same neighborhood, or move into a neighborhood with correlated prices, then these risks may cancel out such that you are are hedged against this uncertainty. The authors use home sales data from the Netherlands to confirm the existence of this hedging opportunity.
This does suggest that if you are planning on buying a house in the future you are exposed to house price risk even if you don’t buy a home today. Heding against future price rises is a benefit of buying a home today.
However, the authors offer two words of caution for those who would seek to capitalize on this in today’s market. First, they note that
…the risk position of households may be aggravated, because income shocks and house price shocks are usually positively correlated.
And second, their empirical evidence shows that the ratio of risk to return is higher during periods of economic decline:
Hence, especially during an economic downturn the risk per unit of return is relatively high. In particular, one euro of return in 2000 was associated with between 0.6 and 1.6 euros spread in returns across types of houses. In 2003, this range was between 1.5 and 3.7 per euro return, and it was even higher in 2008 with the coefficient of variation ranging from 2.8 to 4.3. Hence, risk per unit of return may be between two or three times higher during an economic bust than during an economic boom.
Nevertheless, if you are certain you are going to buy a house in the future, than you are exposed to house price risk. Buying a house today can allow you to hedge against that risk.