Showing papers in "Real Estate Economics in 1995"
TL;DR: In this paper, the authors provide a theoretical and empirical analysis of the impact of listing price on time on the market (TOM) and the transaction price of a real estate property. But their focus was on the seller and his agent.
Abstract: The seller of a real estate property and his broker have two primary goals: to sell the properly for as high a price as possible and as quickly as possible. While these are separate objectives, they are closely related through the listing price of the seller. The listing price affects how long it takes to find a buyer (i.e., Time On the Market = TOM), and TOM influences the price that results from the bargaining between the seller and the buyer. This leaves the seller and his agent with an important question: What is the optimal price to be asked for the property? The objective of this research is to provide a theoretical and empirical analysis of the impact of listing price on TOM and the transaction price.
329 citations
TL;DR: In this paper, the authors examined the securitized and unsecuritized commercial property markets in the United States and the United Kingdom for evidence of price discovery and found evidence that price discovery occurs in the Securitized market structure in both countries.
Abstract: This paper examines the securitized (public) and unsecuritized (private) commercial property markets in the United States and the United Kingdom for evidence of price discovery. Appraisal-based returns are corrected for smoothing, without presupposing the true returns to be uncorrelated or unpredictable across time. Real Estate Investment Trusts (REITs) and property company returns are corrected for leverage. We find evidence that price discovery occurs in the securitized market structure in both countries, and that this price information does not fully transmit to the unsecuritized markets for a year or more. In Britain, the unsecuritized market appears to be more closely and immediately linked to the securitized market than is the case in the U.S.
284 citations
TL;DR: The authors examine characteristics of housing price dynamics that may be consistent with rational learning and not simply irrational feedback trading and find significant patterns of temporal and spatial diffusion that are more amenable to explanations that allow for rational components.
Abstract: We examine characteristics of housing price dynamics that may be consistent with rational learning and not simply irrational feedback trading. We find significant patterns of temporal and spatial diffusion that are more amenable to explanations that allow for rational components. First, we execute our tests not simply on housing price changes, but on town-by-town differentials from regional average price changes. Second, we find significant relationships with own and neighboring town differentials, but not with control groups of non-neighboring towns. Third, we find that population density, a proxy for scale economies in information production, accelerates the diffusion process. Test were performed on quarterly data for large samples from Connecticut and the San Francisco area, employing method of moments estimators.
105 citations
TL;DR: In this paper, a method of index construction that combines multiple sales observations with single sale transactions while permitting characteristics prices from hedonic regressions to vary over time is presented. But the authors do not consider the contribution of repeat sales to the estimation process.
Abstract: Conventional housing price index models assume interperiodparameter stability and typically employ either repeat sales or hedonic methodologies. This paper introduces a method of index construction that combines multiple sales observations with single sale transactions while permitting characteristics prices from hedonic regressions to vary over time. A test for interperiod parameter stability is provided. Each period's data are arranged by location and repeat sales are matched by rows. This construction allows greater use of sample information and acknowledges the unique contribution of repeat sales to the estimation process. It also produces intertemporal error correlations that can be beneficially exploited by the seemingly unrelated regressions (SUH) technique. The paper also demonstrates a significance test for error correlation and discusses the treatment of unequal numbers of observations among index periods.
90 citations
TL;DR: In this article, the authors examined the Real Estate Investment Trust (REIT) market micro-struc-ture and its relationship to stock returns and found that REIT stocks tend to have a lower level of institutional investor participation and are followed by fewer security analysts.
Abstract: This paper examines the Real Estate Investment Trust (REIT) market microstruc-ture and its relationship to stock returns. When compared with the general stock market, REIT stocks tend to have a lower level of institutional investor participation and are followed by fewer security analysts. In addition, REIT stocks that have a higher percentage of institutional investors or are followed by more security analysts tend to perform better than other REIT stocks. Our results seem to confirm Jensen's (1993, p. 868) proposition that ownership structure (that is, who owns the firm's securities) affects the value of the firm. Our findings also have implications about the well documented phenomenon that the financial performance of Commingled Real Estate Funds (CREFs) is better than that of REITs.
90 citations
TL;DR: In this paper, a clustering algorithm is applied to effective rents for twenty-one metropolitan US office markets, and to twenty-two metropolitan markets using vacancy data It provides support for the conjecture that there exists a few major families of cities: including an oil and gas group and an industrial Northeast group Unlike other clustering studies, they find strong evidence of bicoastal city associations among cities such as Boston and Los Angeles.
Abstract: A clustering algorithm is applied to effective rents for twenty-one metropolitan US office markets, and to twenty-two metropolitan markets using vacancy data It provides support for the conjecture that there exists a few major “families” of cities: including an oil and gas group and an industrial Northeast group Unlike other clustering studies, we find strong evidence of bicoastal city associations among cities such as Boston and Los Angeles We present a bootstrapping methodology for investigating the robustness of the clustering algorithm, and develop a means for testing the significance of city associations While the analysis is limited to aggregate rent and vacancy data, the results provide a guideline for the further application of cluster analysis to other types of real estate and economic information
87 citations
TL;DR: In this article, the authors examine the liquidity of real estate investment trust (REIT) as measured by their bid-ask spread and find that REIT spreads have increased over the period 1986-1990, are inversely related to market capitalization, and are similar in magnitude to spreads on other stocks of comparable size.
Abstract: This study examines the liquidity of Real Estate Investment Trusts (REITs), as measured by their bid-ask spread. We find that REIT spreads have increased over the period 1986–1990, are inversely related to market capitalization, and are similar in magnitude to spreads on other stocks of comparable size. Analysis of variance tests indicate that REIT spreads are similar across equity, mortgage and hybrid asset types. Multivariate regression results indicate that market capitalization is the primary determinant of REIT bid-ask spreads, and spreads are larger for National Association of Securities Dealers Automated Quotations (NASDAQ) REITs than for New York Stock Exchange (NYSE) REITs. The regression results also indicate that spreads are lower for equity REITs than for mortgage or hybrid REITs, and are inversely related to the fraction of the REIT's shares held by institutional investors. The similarity between REIT spreads and those of other common stocks holds in both bull and bear real estate markets and suggests that, from a liquidity perspective, REITs are similar to other common stocks.
45 citations
TL;DR: In this article, the authors evaluate the accuracy of the capital-gains component of the office-market return series and compare these with a real value series based on the RN capital-gain component.
Abstract: The leading time series of real estate returns is the Russell-NCREIF (RN) Property Index. The RN series tracks returns, cash flow plus appraised capital gains, for multiple property types. To evaluate the accuracy of the capital-gains component of the office-market return series, this paper constructs two benchmark measures for the present value of projectable office-market cash flows from 1982 to 1991 and compares these with a real value series based on the RN capital-gain component. The RN-based series runs 30% above the highest of the benchmarks throughout the 1986–1989 period. While this overstatement is consistent with the development of a price bubble, failure of the bubble to burst until 1990–1991 is implausible. Real estate experts recognized overvaluation in assessments as early as the spring of 1986.
The RN Office-Market Index was slow to register price declines when the markets first weakened and then overstated the rate of decline once the market began to bottom out. This pattern likely reflects incentives for appraisers to smooth potentially temporary price volatility and for investment managers to maintain appraised values in declining markets. It traces as well as to systematic differences in the character and condition of the properties that lend to trade at different stages of the real estate cycle. These incentives and differences provide reason to believe that other RN indexes were similarly distorted.
45 citations
TL;DR: In this paper, the authors compared the investment policies and returns for portfolios of stocks and bonds with and without up to three categories of real estate, and found that the gains from adding real estate to portfolios of either U.S. or global financial assets were relatively modest.
Abstract: This paper compares the investment policies and returns for portfolios of stocks and bonds with and without up to three categories of real estate. Both domestic and global settings are examined, with and without the possibility of leverage. The portfolios were generated via the dynamic investment model based on the empirical probability assessment approach applied to past (joint) realizations of returns, both with and without correction for “smoothing” in the real estate data series. Our principal findings are: (1) the gains from adding real estate, on a semi-passive (equal-weighted) basis, to portfolios of either U.S. or global financial assets were relatively modest; in contrast, (2) the gains from adding real estate to the universe of U.S. financial assets under an active strategy were rather large (in some cases highly statistically significant), especially for the very risk-averse strategies; (3) the gains from adding U.S. real estate to a universe of global financial assets under an active strategy were mixed, although generally favorable for the highly risk-averse strategies; (4) correcting for second-moment smoothing in the real estate returns series had a relatively small impact for the more risk-tolerant strategies; and (5) there was some evidence that desmoothing resulted in improved probability estimates.
37 citations
TL;DR: For example, the authors found that captive real estate investments trusts have a larger bid-ask spread than noncaptive REITs, after controlling for trading volume, price volatility, insider holdings, institutional holdings and firm size.
Abstract: For the sample period of 1985 and 1986, captive real estate investments trusts (REITs) have a larger bid-ask spread than noncaptive REITs, after controlling for trading volume, price volatility, insider holdings, institutional holdings and firm size. Based on the bid-ask spread literature, the results suggest that captive firms are subject to a greater degree of information asymmetry. This implies a higher cost of capital for captive firms. The evidence here and the trend toward self-administered REITs imply that information asymmetry and conflicts of interests within REITs are priced.
36 citations
TL;DR: In this article, the authors examined the effect of the sale and leaseback of corporate real estate on the stock prices of the selling firms and found that the relationship between the net present value of the lessee and each of the tax rates of the lessor and the corporate lessee is negative.
Abstract: This study examines the effect of the sale and leaseback of corporate real estate on the stock prices of the selling firms. We ask whether the Tax Reform Act of 1986 (TRA 1986) had a negative impact on the market valuation effects of corporate sale and leasebacks. The results of the comparative statics analysis predict that the net present value of the lessee should be negatively related to the tax depreciation recovery life for the lessor and to the marginal ordinary income tax rate of the marginal holder of commercial mortgage debt. However, it should be positively related to the marginal tax rate of the equityholder of the corporate lessee. Changes in the marginal ordinary income tax rates of the lessor and the corporate lessee have an ambiguous effect on the equity value of the corporate lessee. Nevertheless, results of simulation analyses suggest that the relationship between the net present value of the lessee and each of the tax rates of the lessor and corporate lessee is negative. The empirical evidence suggests that subsequent to TRA 1986, the lessee's benefits associated with sale and leaseback transactions have decreased.
TL;DR: In this paper, a finite difference valuation algorithm was developed which accounts for all usual ARM contractual features, in addition to the dynamics of EDCOFI, to determine endogenously the optimal prepayment strategy for mortgage holders.
Abstract: This article analyzes adjustable rate mortgages (ARMs) based on the Eleventh District Cost of Funds Index (EDCOFI). The behavior of EDCOFI was examined over the period 1981–1993. Adjustments in this index lag substantially behind term structure fluctuations. Also, the seasonality and days-in-the-month effects noted by previous authors are really symptoms of a January effect. A finite difference valuation algorithm was developed which accounts for all usual ARM contractual features, in addition to the dynamics of EDCOFI. This pricing algorithm allows us to determine endogenously the optimal prepayment strategy for mortgage holders, and hence the value of their prepayment options. The dynamics of EDCOFI give significant value to this option, typically around 0.5% of the remaining principal on the loan.
TL;DR: In this paper, a study of tenure choice, housing demand and mobility in the submarkets of the Helsinki metropolitan area is presented, based on data on households, type of tenure, housing characteristics and mobility for a sample of Helsinki residents.
Abstract: This is a study of tenure choice, housing demand and mobility in the submarkets of the Helsinki metropolitan area. The empirical analysis is based on data on households, type of tenure, housing characteristics and mobility for a sample of Helsinki residents at the end of 1980s. According to our results the probability of owning is affected not only by user costs of alternative tenure forms but also by permanent income and demographic variables. Results from the tenure specific housing demand models indicate that there are non-neutralities in the housing markets. Permanent income elasticities of housing demand are clearly positive in owner-occupied sector and systematically higher than in the rented sector. The demand for owner-occupied housing depends very strongly on the age of the household head. User cost per housing unit affects housing demand negatively in both tenure forms. Effective demand is greater in private housing sector. The results suggest that owner-occupied living is preferred with heavily subsidized households the least likely to move. In the rental sector, where the probability of moving is higher, it is also true that the most heavily subsidized households are the least likely to move.
TL;DR: In this article, the authors argue that the seller's option of a method of sale induces competitive pressure in the choice of the commission rate by the broker, and conclude that the competitive pressure of direct negotiations between sellers and buyers, relative free entry of brokers and the inappropriateness of the cartel hypothesis cast serious doubt about a general consensus of opinion that the brokerage system is characterized by price fixing, excessive commissions and excessive marketing costs.
Abstract: The major development in this paper concerns the failure, in earlier studies, to consider interaction between alternative methods of arranging sales in the housing market. A seller may market a house by direct negotiations with buyers, without the intermediation of real estate brokers, or by listing the house with a broker. A rational seller would choose the option which offers the higher expected return on the house. In a sequence of models we argue that the seller's option of a method of sale induces competitive pressure in the choice of the commission rate by the broker. We also consider the split rate in a multiple listing system, ease of entry of brokers and the cartel hypothesis as applied to brokers. We conclude that the competitive pressure of direct negotiations between sellers and buyers, relative free entry of brokers and the inappropri-ateness of the cartel hypothesis cast serious doubt about a general consensus of opinion that the brokerage system is characterized by price fixing, excessive commissions and excessive marketing costs.
TL;DR: In this paper, the authors studied the financial barriers to ownership entry in Austria and Germany and found that the existing entry barriers have raised concerns among the current decision makers and may initiate financial reforms in the near future.
Abstract: This paper studies the financial barriers to ownership entry in Austria and Germany. In both countries the financial institutions are similar but there are differences as to public assistance, mortgage markets and risk allocation. Various risk shifting mechanisms between borrowers, banking and the state, and their impacts on social costs and social efficiency, are discussed. The findings indicate possible credit-rationing as an outcome of the current securitization methods used in Austrian and German bank intermediation and their interaction with subsidy and tax allowance instruments. The existing entry barriers have raised concerns among the current decision makers and may initiate financial reforms in the near future.
TL;DR: In this paper, a multistate default model is applied to the mortgage market in the United Kingdom and a pricing structure for the U.K. endowment mortgage, which combines a good and a life insurance policy, is developed.
Abstract: A mortgage pricing model is developed when a borrower goes through a series of distress states, including delinquency, long-term nonpayment and ultimate default. These steps are sequential, and depend on prices and alternatives faced by the borrower. The multistate default model is applied to the mortgage market in the United Kingdom. As a byproduct, a pricing structure for the U.K. endowment mortgage, which combines a good and a life insurance policy, is developed. Income and liquidity constraints are shown to affect the decision to keep a mortgage current in different states of distress. Solvent borrowers may thus keep their mortgages current, even when equity is negative.
TL;DR: In this article, the real estate investor's strategy in terms of choosing an interest rate-discount points combination was analyzed by using a discounted cash flow approach, where the investor with a lower marginal tax rate, lower required rate of return and longer investment horizon tends to negotiate for a mortgage contract with a higher number of discount points and lower interest rate.
Abstract: This paper is distinguished from previous papers by its focus on income-producing properties, rather than owner-occupied single-family residential properties. The real estate investor's strategy, in terms of choosing an interest rate-discount points combination, is analyzed by using a discounted cash flow approach. Under this framework, the investor with a lower marginal tax rate, lower required rate of return and longer investment horizon tends to negotiate for a mortgage contract with a higher number of discount points and lower interest rate. In addition, an intermediate rate-points combination is preferred by an investor only when the lender's required interest rate is a decreasing convex function of the number of discount points.
TL;DR: In this paper, the authors argue that sellers have an incentive to renegotiate a lower commission as the end of the contract approaches, and that courts should generally enforce such renegotiations, given that transaction costs between brokers and sellers are ordinarily low.
Abstract: When a property owner engages a real estate broker to sell his or her property, the parties enter into a listing contract which entitles the broker to a commission if a ready, willing and able buyer is found before the contract expires. While a limit on the duration of the contract provides the broker with an incentive to work hard to find a buyer, it also creates the potential for seller opportunism. In particular, sellers have an incentive to renegotiate a lower commission as the end of the contract approaches. The paper concludes that, from an efficiency perspective, courts should generally enforce such renegotiations, given that transaction costs between brokers and sellers are ordinarily low.
TL;DR: In this paper, the authors examined the effect of housing market disequilibria on the supply of labor and found that the least skilled workers had the greatest impact on the labor supply.
Abstract: This paper examines the effect of housing market disequilibrium on the supply of labor. Earlier studies suggested that housing market disequilibria affected other markets through altered consumption patterns (Podkaminer 1982, 1988) or because housing shortages restricted labor mobility (Mayo and Stein 1988). This paper examines the disincentive to supply labor which arises from housing market disequilibrium. The disequilibrium is measured by four variables. One is a measure of density, while the others are based upon the number of persons in official housing queues. Each of the variables is negative and significant in the two-stage least squares estimates of labor supply. Estimates disaggregated by skill-class are also presented. Housing market disequilibrium has the greatest impact on the labor supply of the least skilled.
TL;DR: In this article, the authors investigated the relationship between regional economic diversification and stability and residential mortgage default risk in the Netherlands, and concluded that the employed measures explain regional mortgage default rates to a significant extent, and that stability measures outperform diversity measures.
Abstract: This paper investigates the relationship betv^'een regional economic diversification and stability, and residential mortgage default risk in the Netherlands, To describe and measure regional economic diversity and stability, methods from both the regional economics and the industrial economics literature are used. All measures are based on regional employment characteristics. Mortgage default rates were obtained from a database of the population of insured mortgage defaults in the Netherlands from 1983 through 1990. To test the relationship betv^^een the measures and mortgage default risk, cross sectional Seemingly Unrelated Regression Vi^as used. The paper concludes that the employed measures explain regional mortgage default rates to a significant extent, and that stability measures outperform diversity measures. Like tiiany countries, the Netherlands has a program of incentives for private home-ownership. It consists mainly of tax advantages and subsidies, but a public mortgage in.surance system is also included in the program. This mortgage insurance system is called Gemeentegarantie (Municipal Guarantee). The system is run partly by the central government and partly by the municipalities. Applications for mortgage insurance are judged by a central body, which advises the municipalities whether to grant the insurance or not. This advice is followed by the municipalities in 97% of all cases, with the basic criteria being the same for ail the municipalities.
TL;DR: In this article, the authors used the no-arbitrage condition to deduce the price of the prepayment option embedded in fixed-rate Government National Mortgage Association (GNMA) mortgage-backed securities.
Abstract: In an efficient market, the no-arbitrage condition implies that the price difference between any two assets must be the market value of all differences in their cash flows. We use this logic to deduce the price of the prepayment option embedded in fixed-rate Government National Mortgage Association (GNMA) mortgage-backed securities. The option price equals the difference between an observed GNMA price and the cost of a synthetic, nonprepayable GNMA constructed from the least expensive portfolio of Treasury securities that exactly replicates the promised GNMA cash flow stream, assuming prepayment is precluded. We regress the option prices on variables found significant in previous prepayment studies, finding that five key regressors explain more than 90% of the prepayment option value in pooled time-series cross-sectional analysis. We also show that the time value of the prepayment option calculated by our method displays a pattern similar to that produced by the Black-Scholes (1973) option pricing model. An additional empirical result is the existence of negative option prices and negative time value of the option prices. We attribute these to the fact that homeowners sometimes exercise their prepayment options when they are out-of-the-money, and to refinancing transaction costs. Our method is independent of assumptions regarding interest rate processes and the homeowner's prepayment behavior, and it provides a benchmark for testing theoretical prepayment models.
TL;DR: In this article, the authors evaluate real estate market efficiency and the distributional outcomes associated with diverse institutions and economies, and draw from the experience of different markets and institutions in a normative sense, so as to help facilitate the development of appropriate real-estate market mechanisms and policy in emerging market economies.
Abstract: Recent years have seen the emergence of substantial scholarly research devoted to cross-national comparisons of real estate markets and financial institutions. In part, these analyses evaluate real estate market efficiency and the distributional outcomes associated with diverse institutions and economies. Further, these analyses draw from the experience of different markets and institutions in a normative sense, so as to help facilitate the development of appropriate real estate market mechanisms and policy in emerging market economies.