“Housing Is the Financial Cycle: Evidence from 100 Years of Local Building Permits”
With the Lunch Seminar series, the Department of Finance is bringing eminent and up-and-coming researchers from around the world to Luxembourg.
Abstract
Does the housing market lead the financial cycle, and if so, why?
We address these questions by creating a new hand-collected database spanning a century of monthly building permit quantities and valuations for all U.S. states and the 60 largest MSAs. We show that the option to build embedded in permits renders volatility in residential building permit growth (BPG) a strong predictor of aggregate and cross-sectional stock and corporate bond return volatility. This predictability remains even after conditioning on a battery of factors, including corporate and household leverage and firms’ exposure through their network of plants to other localized physical risks like natural disasters. Cities and states with more elastic housing supply consistently predict financial market downturns at 12-month horizons, resulting in new trading strategies to hedge against overbuilding risk. A noisy rational expectations framework in which local building permits serve as a quasi-public signal for dividends explains these empirical patterns.
About the speaker
Cameron LaPoint is an Assistant Professor of Finance at Yale School of Management.
Language
English.
This is a free event. Registration is mandatory.
Cold lunches are provided to registered participants only.