Housing Decisions under Mobility Risk: A Stochastic Threshold Approach

TL;DR

This paper introduces a stochastic threshold model for housing decisions considering mobility risk, showing how uncertainty affects buy-versus-rent choices and explaining cross-market differences.

Contribution

It provides a closed-form solution for the optimal decision boundary under mobility risk, linking it to price-to-rent ratios and market volatility.

Findings

Mobility risk shortens effective housing holding periods.

Higher volatility and relocation rates raise the buy-versus-rent threshold.

The model explains heterogeneity in housing decisions across different markets.

Abstract

We develop a stochastic free-boundary model of housing tenure decisions in markets with high mobility risk, such as areas near military installations. Housing prices and rents follow correlated diffusion processes, and households face an uncertain relocation horizon. We derive a closed-form characterization of the optimal buy-versus-rent boundary in terms of the price-to-rent ratio. The model highlights how mobility risk reduces the value of ownership by shortening the effective holding period and increasing uncertainty. As a result, identical price-to-rent ratios can imply different optimal decisions across locations. Numerical illustrations show how variations in volatility and relocation intensity shift the threshold, providing a structural interpretation of observed cross-market heterogeneity. The framework offers a tractable tool for analyzing housing decisions under uncertainty and for interpreting price-to-rent ratios in high-mobility environments.