What Do Financial Asset Prices Say About the Housing Market?

35 Pages Posted: 13 Dec 2006

See all articles by J. Benson Durham

J. Benson Durham

Columbia University; Cornerstone Macro LLC

Date Written: September 2006

Abstract

This paper examines the first three moments of investors' expectations for the housing sector. That is, first, what do financial markets imply about expected future home prices? Second, how much confidence do investors have in their forecast? And, third, do market participants see more downside than upside risk? Housing futures and options, which trade on the Chicago Mercantile Exchange (CME), are not yet deep and liquid, and derivatives on homebuilders' shares reflect considerable idiosyncratic information and are therefore an imperfect proxy. Nonetheless, prices suggest that investors currently expect some mild depreciation in home values within the next year. Also, uncertainty has increased, but, generally inconsistent with the perception of a "bubble," the implied risks do not seem particularly tilted to the downside. Probability density functions derived from options on homebuilders' stocks are not appreciably skewed to the left in general, vis-à-vis the broader market, or with respect to recent history.

Keywords: Home prices, financial assets

JEL Classification: G0

Suggested Citation

Durham, J. Benson, What Do Financial Asset Prices Say About the Housing Market? (September 2006). FEDS Working Paper No. 2006-32, Available at SSRN: https://ssrn.com/abstract=951016 or http://dx.doi.org/10.2139/ssrn.951016

J. Benson Durham (Contact Author)

Columbia University ( email )

School of International and Public Affairs
420 W 118th St
New York, NY 10027
United States

Cornerstone Macro LLC ( email )

1330 Sixth Avenue, 5th Floor
New York, NY 10019
United States

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