Neighbourhood externality risk and the homeownership status of properties

In contrast to corporate and institutional investors, single owner-occupiers cannot adequately diversify housing investment risk. Ceteris paribus, homeownership should be relatively less likely in places with higher housing investment risk. Using the American Housing Survey, it is documented that neighborhood externality risk, a major component of housing investment risk, substantially reduces the probability that a housing unit is owner-occupied, having controlled for housing type, turnover probability of the unit, household-specific characteristics, and locationspecific characteristics, including the levels of neighborhood externalities as well as MSA-level and center city unobservable characteristics. Depending on the type of externality, model specification, and sample used, a decrease of one specific risk variable by one standard deviation increases the probability that a unit is owner-occupied between 1.5 percent and 12.3 percent. An analysis of units that change their homeownership status suggests that this effect may be causal.