Edward Conard

Top Ten New York Times Bestselling Author

  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
Upside of Inequality Oxford Unintended Consequences

AI Summary. Housing delivers long-run returns comparable to equities across 16 advanced economies, but with lower volatility and lower correlation to consumption growth, implying risk aversion parameters for housing wealth that are 2x or more larger than those for equities.

Òscar Jordà, Moritz Schularick, Alan Taylor National Bureau of Economic Research
Date Posted:
Is Database:
Database

Housing returns in the long run are comparable to equities but exhibit lower volatility and lower covariance with consumption growth, according to @MoritzSchularick @AlanMTaylor @oscarjorda @nberpubsorg.

Why do investors undervalue housing despite superior risk-adjusted returns?

Core argument: Housing returns matched equity returns across 16 advanced economies from 1870–present despite exhibiting 2x lower volatility, leading to housing's emergence as a lower-risk diversification component that challenges traditional asset pricing models.

Analyzing data from 1870 to the present across 16 advanced economies, housing returns in the long run are comparable to equities but exhibit lower volatility and lower covariance with consumption growth. This suggests that housing offers a more stable investment option with less risk exposure compared to equities. The findings indicate that the implied risk aversion parameters for housing wealth and total wealth are significantly larger than those for equities, often by a factor of 2 or more. This challenges traditional models and suggests that factors like limited participation, idiosyncratic housing risk, transaction costs, or liquidity premiums play minimal roles in resolving the risk premium puzzle. Consequently, housing emerges as a viable component of a diversified investment portfolio, offering substantial returns with reduced risk.

Takeaways by Macro Roundup® AI

  1. Housing returns matched equity returns across 16 advanced economies from 1870–present despite exhibiting 2x lower volatility, leading to housing's emergence as a lower-risk diversification component that challenges traditional asset pricing models.
  2. Risk aversion parameters for housing wealth exceed those for equities by a factor of 2 or more, driven by housing's substantially lower covariance with consumption growth, suggesting structural factors beyond transaction costs or liquidity constraints explain the housing risk premium puzzle.

"...The risk premium puzzle is worse than you think. Using a new database for the U.S. and 15 other advanced economies from 1870 to the present that includes housing as well as equity returns (to capture the full risky capital portfolio of the representative agent),standard calculations using returns to total wealth and consumption show that: housing returns in the long run are comparable to those of equities, and yet housing returns have lower volatility and lower covariance with consumption growth than equities.The same applies to a weighted total-wealth portfolio, and over a range of horizons. As a result, the implied risk aversion parameters for housing wealth and total wealth are even larger than those for equities, often by a factor of 2 or more. We find that more exotic models cannot resolve these even bigger puzzles, and we see little role for limited participation, idiosyncratic housing risk, transaction costs, or liquidity premiums...."

Òscar Jordà, Moritz Schularick, Alan Taylor, "The Total Risk Premium Puzzle," National Bureau of Economic Research, March 2019, https://www.nber.org/papers/w25653

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