Real hedging is the practice of getting onto the property ladder in order to trade up to a larger home in the future. We define the value of the real hedge of home ownership as the difference between the risk premiums of renting and owning and explore how this value depends on local housing price dynamics and household characteristics. Controlling for the potential endogeneity of housing bubble bursts across different U.S metropolitan areas, we find a significantly higher correlation in the appreciation rates across the Standard & Poor's Case-Shiller tiered house price indices in the period after the housing crisis. We conclude that real hedging has become more attractive in the period after the crisis, particularly in markets exhibiting momentum and high volatility in returns.
Damianov, D.S. and Escobari, D. (2021), Getting on and Moving Up the Property Ladder: Real Hedging in the U.S. Housing Market Before and After the Crisis. Real Estate Economics, 49: 1201-1237. https://doi.org/10.1111/1540-6229.12276
Real Estate Economics