Financial Uncertainty Premium in Housing Markets

This paper studies the pricing implications of financial uncertainty on housing markets. Out-of-sample tests show that the exposure to financial uncertainty predicts the cross-sectional variation in market returns. Housing markets with a more negative financial uncertainty beta imply higher future compensating returns compared to markets with more positive betas. This financial uncertainty premium cannot be explained by alternative risk factors. We relate more negative uncertainty betas to the larger market-specific share of more risky mortgage segments, which are financed through securitization and therefore are more vulnerable to funding freezes when financial uncertainty is high