Home price appreciation is one percent more volatile than the stock market
The changes in the value of American homes have become as unpredictable as a stock market index, according to Unison’s Home Volatility Index.
To keep up with the volatile housing market, the firm has created the new index to measure the volatility of home equity.
“For a typical household, home equity is typically 60% of the total financial portfolio,” said Brodie Gay, vice president of research at Unison. “We believe homes have been left out of financial planning – even though for American homeowners the house is the bulk of their net worth – because we didn’t have a good way to measure risk for this asset. That’s why we set out to build this index.”
The index revealed that the average volatility of home price appreciation every year has grown to nearly 15% annually since 2000, one percentage point higher than equity stock indices.
The volatility of US homes soared to over 35% year-over-year when the bubble burst in 2008. The spike suggests that the financial risk of residential real estate is extremely vulnerable during a financial crisis, according to Unison.
Usually, new homebuyers have the highest proportion of net worth staked to their homes and are likely taking on the most mortgage debt. The report added that new homebuyers who borrow five to 20 times their net worth could lose their entire net worth from taking too much risk.
When the home is included, Unison Chief Executive Officer Thomas Sponholtz said that how homeowners perceive the volatility of their portfolio could differ from the actual risk.
“In fact, when you include the home in the equation, which is what this index enables us to do, you see that the typical volatility is 21% – one point higher than the most aggressive portfolios offered by most financial advisors,” Sponholtz said. “The proliferation of very low down-payment, high-leverage mortgages has led to home price risk exposures that are far beyond levels that a homebuyer should be comfortable with. The home is more than a financial asset; it’s where you live with your family, and should not be where you take this level of excessive risk.”
