  Geographic diversification is fundamental to risk mitigation among investors
and insurers of housing, mortgages, and mortgage-related derivatives. To
characterize diversification potential, we provide estimates of integration,
spatial correlation, and contagion among US metropolitan housing markets.
Results reveal a high and increasing level of integration among US markets over
the decade of the 2000s, especially in California. We apply integration results
to assess the risk of alternative housing investment portfolios. Portfolio
simulation indicates reduced diversification potential and increased risk in
the wake of estimated increases in metropolitan housing market integration.
Research findings provide new insights regarding the synchronous
non-performance of geographically-disparate MBS investments during the late
2000s.
