Housing choices and labor income risk

I show that if there is a negative covariance between the returns to owner-occupied housing and the risk of becoming unemployed, the housing asset becomes riskier for households to hold. In other words, if the value of the home tends to fall at the same time as the risk of unemployment increases, it is risky to be a homeowner. Using Swedish microdata the findings of my empirical analysis strongly indicate that there is, in line with the theoretical predictions, a significant positive relationship between households' investments in housing and the individually estimated covariance between unemployment risks and returns to housing.