Housing Risk and Returns in Submarkets with Spatial Dependence and Heterogeneity

Employing a recently developed panel econometric technique, first, we show that accounting for spatial dependence and heterogeneity yields more accurate risk factor coefficients abnormal housing returns. Rather than systematic risks, idiosyncratic risks explain the variations in residential excess After controlling asset-specific factors, positive significant impact of unobservable common factors on returns suggests speculative market forces drive Second, then analyze houses affordable expensive submarkets allowing heterogeneity. We find perform better submarkets. Thus, potential demand submarket may aggravate affordability crisis. Our study’s results, therefore, encourage policymakers investors to view as collection regional units submarkets, but not single national market.