Drowning or Hedging The Risks and Rewards of Owning a Home

Nearly 11 million homeowners who bought at the peak of the real estate market before the economic downturn, or who took cash out of their homes through readily available refinancing, are now feeling the pain of owing more than their properties are worth. That population - roughly one-fifth of those who pay mortgages - is big enough to make even the most cavalier consumer think twice before buying a home, especially when key pricing indexes are showing continuing weakness in markets across the country. According to the Case-Shiller 10-city composite house price index, real house prices dropped by more than 31% between the end of 2005 and the end of 2008. But potential home buyers' fears may not be entirely justified. While the change in housing values might discourage homeownership, new Wharton research suggests that owning a home is less risky than might be expected and can effectively hedge against volatile prices for shelter, including rental rates, if a buyer does not take on excessive debt to make the purchase. In a paper titled, "Can Owning a Home Hedge the Risk of Moving?" Wharton real estate professor Todd Sinai and co-author Nicholas S. Souleles, a Wharton finance professor, explore the risk of homeownership among consumers who move from one market to another. The authors use census data that tracks individual moves to study the volatility of housing prices between the markets where people live and the markets where they tend to migrate.