When Real Estate is the Only Game in Town

Hyun-Soo Choi, Singapore Management University
Harrison Hong, Princeton University
Jeffrey D. Kubik, Syracuse University
Jeffrey K. Thompson, Federal Reserve Board


We test the hypothesis that households are more likely to purchase investment homes nearby when there is a lack of local public equity investment opportunities. Surveys indicate that most households' investment homes are located within 60 miles of their primary residence. Following Hong, Kubik, and Stein (2008), we use the RATIO variable of aggregate book value of firms headquartered in a city to total income in that city as a proxy for local equity investment opportunities. The fraction of second home mortgages to total mortgages originated in a city is strongly negatively correlated with RATIO. Using a sample of household portfolios, we find that households living in Census Divisions with low RATIO are more likely to have investment homes. The price-to-rent ratio of investment homes is also higher when there are fewer firms nearby.