Intertemporal Risk-Return Relationship in Housing Markets

We empirically investigate the intertemporal risk-return relationship in the U.S. housing market. Consistent with the theoretical predictions in Merton's (1973) intertemporal capital asset pricing model (ICAPM), the national (regional) housing market displays a significantly positive relationship between its conditional variance (covariance) and capital gains. Results provide empirical support for housing showing that risk-averse agents require higher returns to reward higher risk in an intertemporal framework.