Housing risk and the cross section of returns across many asset classes

Abstract This article documents that a single‐factor model based on shocks to the residential investment share, or the ratio of residential‐to‐nonresidential investment, exhibits strong explanatory power for expected returns across various characteristic‐sorted portfolios in equity and other asset classes. The residential investment share captures time‐varying demand for housing services and is a state variable of the economy. Consequently, innovations to the share emerge as a risk factor in asset prices in the cross section. The empirical results are robust to controlling for other factor models based on durable consumption, financial intermediaries, household heterogeneity, and return‐based multifactor models designed to price these assets.