Showing papers in "Real Estate Economics in 1996"
TL;DR: In this paper, the positive correlation between changes in turnover of existing homes and changes in housing demand was investigated and a search model was developed to explain the linkage. But it is not clear if, or why, this linkage exists.
Abstract: Changes in the turnover of existing homes are often equated with changes in housing demand, but it is not clear if, or why, this linkage exists. This paper documents the positive correlation between changes in turnover and changes in housing demand and develops a search model that explain the linkage. One implication of the analysis is that, for high frequency data, turnover is superior to price as an indicator of change in housing demand.
163 citations
TL;DR: In this article, a simple model of a metropolitan housing market is presented identifying three interrelated submarkets and estimating equations for rent, housing prices and urban land prices using two-stage least squares.
Abstract: In attempting to explain why housing prices, rents and urban land prices vary so dramatically between U.S. metropolitan areas, a simple model of a metropolitan housing market is presented identifying three interrelated submarkets. Estimating equations for rent, housing prices and urban land prices are identified and estimated using two-stage least squares. The empirical results provide strong support for the theoretical model concerning how these three submarkets interact. The results also suggest that household income and construction costs are the most important factors causing housing prices, rents and land prices to vary between metropolitan areas.
163 citations
TL;DR: The authors derived a forward-looking rational expectations house price model and empirically tested its ability to explain short-run fluctuations in real house prices in Vancouver, British Columbia from 1979 to 1991.
Abstract: This paper derives a forward-looking rational expectations house price model and empirically tests its ability to explain short-run fluctuations in real house prices. A novel approach to proxying the imputed rents of owner-occupied housing, as a function of observable housing market fundamentals, is combined with a housing market arbitrage relation to derive a present value model for real house prices. Tests of the rational expectations, nonlinear cross-equation restrictions reject the joint null hypothesis of rational expectations and the asset-based housing price model for quarterly, single-detached house prices in the city of Vancouver, British Columbia from 1979–1991. The model fails to fully capture observed house price dynamics in two real estate booms but tracks real house prices well in less volatile times, suggesting that prices may temporarily deviate from fundamental values in real estate price cycles.
146 citations
TL;DR: In this paper, the authors employed stock market-based data to examine the systematic risk and diversification properties of publicly traded equity real estate investment trusts (REITs) by combining firm return data with information on their property type holdings and the location of their investments.
Abstract: This paper employs stock market-based data to examine the systematic risk and diversification properties of publicly traded equity real estate investment trusts (REITs). A unique data sample is created by combining firm return data with information on their property type holdings and the location of their investments. The systematic risk of equity REITs appears to vary by the type of property in which they invest, with beta being significantly higher for retail-oriented REITs than for REITs owning industrial and warehouse properties. In addition, the stock market data provides no evidence that REIT diversification across property types or broad geographic regions actually results in meaningful diversification as reflected in a standard market-based measure—the R2 from a simple market model regression.
135 citations
TL;DR: In this article, the authors consider how the potential for mixing uses and redevelopment impact property value and find that operating flexibility of this type is found to significantly increase property value when the correlation between payouts from different property types is low or when redevelopment costs are low.
Abstract: This paper considers how the potential for mixing uses and redevelopment impact property value. Operating flexibility of this type is found to significantly increase property value when the correlation between payouts from different property types is low or when redevelopment costs are low. The ability to mix uses and redevelop over time is also shown to affect the timing of initial land development. The shape of the development boundary is shown to differ considerably depending on whether marginal revenue is constant or decreasing to scale. Both policy and empirical implications concerning the effects of multiple-use zoning are discussed.
129 citations
TL;DR: In this paper, a two-stage least squares model of housing prices is estimated with data collected from 3358 single-family home transactions, and the results provide evidence for an optimal marketing period and indicate that a liquidity premium is priced in single family home sales.
Abstract: A two-stage least squares model of housing prices is estimated with data collected from 3358 single-family home transactions. The results provide evidence for an optimal marketing period and indicate that a liquidity premium is priced in single-family home sales. Consistent with the hypothesis derived from economic search models, the model shows higher selling prices for houses having longer expected marketing periods. The model also shows a price premium for houses that sell faster than expectations. This effect supports the concept that liquidity is a value-enhancing characteristic.
128 citations
TL;DR: In this article, the role of direct real estate investment in a portfolio context incorporating the real estate imperfections of indivisible assets and no short sales was explored, and the authors suggest that a 9% allocation to real estate is optimal, rather than the 20% figure suggested in other studies.
Abstract: This study explores the role of direct real estate investment in a portfolio context incorporating the real estate imperfections of indivisible assets and no short sales. Mean-variance efficient portfolios are calculated using Treasury-bills, bond and equity indices together with cash flows and appraised values from a set of twenty-two properties having an aggregate appraised value of $336 million. Real estate diversification benefits are shown to be the greatest with smaller properties and are most advantageous at higher target levels of return. The study suggests that a 9% allocation to real estate is optimal, rather than the 20% figure suggested in other studies.
123 citations
TL;DR: In this paper, a comparison of house prices brought by English auctions and private negotiations produced evidence that the pricing mechanism matters, and that auctions extracted higher prices than private negotiations in an active market for middle-to high-priced houses.
Abstract: A comparison of house prices brought by English auctions and private negotiations produced evidence that the pricing mechanism matters. In an active market for middle- to high-priced houses, auctions extracted higher prices than private negotiations.
93 citations
TL;DR: In this paper, the degree of substitutability between securitized real estate assets and real-estate assets whose prices are appraisal-based was investigated, and the empirical evidence showed that the prices of the transactions-based assets (real estate investment trusts and the stock price index of the home building industry).
Abstract: This paper investigates the degree of substitutability between securitized real estate assets and real estate assets whose prices are appraisal-based. Given the insensitivity of unsecuritized asset's returns to the returns on stock market indices, equilibrium asset pricing models cannot be used to compare these two avenues of investment. Two assets are deemed substitutable if the information sets underlying unbiased, minimum error variance estimates of their pricing parameters are identical. The empirical evidence shows that the prices of the transactions-based assets—real estate investment trusts and the stock price index of the home building industry—follow a random walk while the prices of the appraisal-based assets—FRC/NCREIF indices—do not. The variance decompositions of the vector autoregressions also show that the level of economic activity helps predict the price indices of appraisal-based assets while the stock market index and the term structure of interest rates are better predictors of the prices of transactions-based assets
66 citations
TL;DR: In this article, the authors examined the determinants of industrial properly value and found that the value of industrial buildings during 1987-1991 in the Dallas/Fort Worth area is primarily related to local market effects and to physical characteristics and location of the property.
Abstract: This paper examines the determinants of industrial properly value. We use the factor-analytic linear structural relations (LISREL) model to confront measurement problems associated with related work. A simultaneous test of the effects on property value of factors summarizing physical property, national market, local market, interest rate and location variables is performed. Findings indicate that the value of industrial buildings during 1987–1991 in the Dallas/Fort Worth area is primarily related to local market effects and to physical characteristics and location of the property.
61 citations
TL;DR: In this paper, the authors examined the entire efficient frontier using the traditional point estimate method and the bootstrap simulation, and they showed that when uncertainty is introduced, the efficient frontier becomes fuzzy and the weight vectors become even fuzzier.
Abstract: How much in real estate? To answer this question, uncertainty needs to be introduced into the efficient frontier, so that a confidence interval can be estimated for the real estate weight in a mixed-asset portfolio. Instead of focusing on a single optimal portfolio, this study examines the entire efficient frontier using the traditional point estimate method and the bootstrap simulation. The bootstrap distributions of the estimated weight vectors indicate that their confidence intervals are large enough to render them effectively useless. Once uncertainty is introduced, the efficient frontier becomes fuzzy and the weight vectors become even fuzzier.
TL;DR: In this paper, the authors show that it is not optimal for the owner to default as soon as net cash flow becomes negative, and that the owner can expropriate some of the mortgage lender's wealth by injecting cash and continuing to pay interest.
Abstract: When a leveraged real estate project experience cash-flow problems, the owner must either inject additional cash or default on the mortgage. We show that it is not optimal for the owner to default as soon as net cash flow becomes negative. Surprisingly, the owner can expropriate some of the mortgage lender's wealth by injecting cash and continuing to pay interest. When the owner has cash constraints, outside investors may be able to extract significant economic rents by financing distressed real estate projects. These results have interesting implications for mortgage lending and the pattern of real estate transaction volume.
TL;DR: The authors examined the incidence and extent of racial discrimination in various dimensions of owner-occupied housing search Audit data for sales units (1980-90) from the Fair Housing Center of metropolitan Detroit is used in an ordered probit framework.
Abstract: This paper examines the incidence and extent of racial discrimination in various dimensions of owner-occupied housing search Audit data for sales units (1980-90) from the Fair Housing Center of metropolitan Detroit is used in an ordered probit framework Agents' own prejudices and the prejudices of their customers are shown to be significant in explaining discrimination Results also indicate that white home seekers are steered toward more white and affluent neighborhoods
TL;DR: In this article, the authors analyzed the probabilities of prepayment or default for fixed-rate and adjustable-rate mortgages (ARMs) and found that ARM holders are less mobile than FRM holders.
Abstract: This paper analyzes the probabilities of prepayment or default for Fixed Rate Mortgages (FRMs) and Adjustable Rate Mortgages (ARMs). Using data from the period 1985–1992, the analysis indicates that the likelihood of prepayment of thirty year FRMs was determined primarily by house price appreciation and personal income growth and the likelihood of prepayment of fifteen year FRMs was determined primarily by interest rate changes. ARMs were prepaid less frequently than FRMs, were less likely to be prepaid when interest rates declined and defaulted more often than FRMs. The analysis provides evidence that ARM holders are less mobile than FRM holders.
TL;DR: This article surveyed members of the two most important real estate academic organizations and found that the Journal of the American Real Estate and Urban Economics Association (changed to Real Estate Economics in 1995) was the most important outlet for promotion and tenure and the Appraisal Journal is the most relevant outlet for professional applicability.
Abstract: An understanding of how thirty real estate journals are perceived for promotion and tenure and for professional applicability was sought by surveying members of the two most important real estate academic organizations. Several subgroup comparisons were made revealing some common perceptions but a significant amount of disagreement as well. Among findings robust across the surveyed community were that the Journal of the American Real Estate and Urban Economics Association (changed to Real Estate Economics in 1995) is the most important outlet for promotion and tenure and the Appraisal Journal is the most important outlet for professional applicability. Two distinct journal groupings emerged: an academic group composed of eight journals and a professional group of twenty.
TL;DR: In this paper, a review of contemporary African housing markets, particularly the consequences of current housing policies, is presented, and the authors conclude that the resource allocation which results from the current housing policy are quite contrary to their intended objectives.
Abstract: This paper is a review of contemporary African housing markets, particularly the consequences of current housing policies. Overall, we conclude that the resource allocation which results from the current housing policies are quite contrary to their intended objectives. Many of the policies are suspect, both in terms of underlying economic rational and realistic economic achievement. In many respects, these policies have discouraged housing investment, and have been both inequitable and distortional. In rethinking these policies, our prescription is that since the private sector has efficiently provided the majority of the housing in the past, African governments must disengage themselves from direct production of housing. They must deregulate the housing markets and provide the right incentives, so as to realign the risks and rewards of investment in housing and permit private production to flourish.
TL;DR: This paper found that banks with low capital ratios reduce their real estate lending substantially more after formal regulatory actions have been initiated by regulators, and this reduction in lending is particularly large for the categories of real estate borrowers most likely to be bank dependent.
Abstract: Recent studies have found that banks with low capital ratios have significantly decreased their lending to the real estate sector. This correlation between real estate lending and bank capital could be the result of voluntary decisions by banks to recapitalize, or it could be the result of direct actions taken by bank regulators. We find that banks with low capital ratios reduce their real estate lending substantially more after formal regulatory actions have been initiated by regulators. Furthermore, this reduction in lending is particularly large for the categories of real estate borrowers most likely to be bank dependent.
TL;DR: In this article, the set of Pareto optimal and stable matchings among buyers and sellers and examines the optimality of matching strategies employed by brokers under different commission structures were analyzed.
Abstract: This note characterizes the set of Pareto optimal and stable matchings among buyers and sellers and examines the optimality of matching strategies employed by brokers under different commission structures. It is shown that the profit-maximizing matching strategy for the broker under percentage commission and flat-fee systems also maximizes the number of houses sold, but it minimizes the buyers' and sellers' surplus. On the other hand, net listing results in the sale of fewer houses, but it yields larger surplus for buyers and sellers.
TL;DR: In this article, an asset pricing model for homeowners with the undiversifiable home equity asset is developed, and the existence of a rational expectations equilibrium under appropriate conditions is demonstrated. But the authors do not consider the effect of home equity risk on home ownership.
Abstract: Homeowners do not diversify their risky home equity because of fixed costs of issuing securities and information costs. An asset pricing model is developed for homeowners with the undiversifiable home equity asset. Homeowner value and house value to diversified landlords are compared, and a tenure choice equation is developed. We demonstrate the existence of a rational expectations equilibrium under appropriate conditions.
TL;DR: This article found that city employment growth has a significant positive effect on suburban house values; this effect is largest for housing closest to the central business district and declines with increasing distance from it.
Abstract: Using a data set of over 88,000 housing sales, we find that city employment growth has a significant positive effect on suburban house values; this effect is largest for housing closest to the central business district and declines with increasing distance from it. City employment growth has a negative effect on the rate of suburban house construction; the magnitude of the effect increases with distance. Suburban employment growth has little aggregate effect on house prices, and there is less variation by distance. Suburban growth has a significant effect on construction rates, especially at locations near the urban fringe.
TL;DR: In this article, the authors focus on nonprice competition in the level or quality of services offered buyers and sellers in the market, examining the equilibrium adjustment process, comparative static predictions and efficiency implications.
Abstract: Given a fixed commission rate and easy entry, economic profits must be competed away on some nonprice margin in the real estate brokerage market. This paper focuses on nonprice competition in the level or quality of services offered buyers and sellers in the market, examining the equilibrium adjustment process, comparative static predictions and efficiency implications. In contrast with earlier studies focusing on wasteful advertising, this paper demonstrates that higher commission rates can either increase or decrease deadweight loss, depending upon how broker services affect buyer and seller transaction costs.
TL;DR: The authors used an overidentified vector autoregression model to simulate the effects of unseasonable increases in temperature and precipitation on housing starts and completions in each of the four Census regions.
Abstract: We simulate the effects of unseasonable increases in temperature and precipitation on housing starts and completions in each of the four Census regions. Using an overidentified vector autoregression model the dynamics of housing starts and completions are estimated. The persistence of housing activity over time implies that weather shocks also have long-lasting effects, though the impact seems large only in the North Central region.
TL;DR: This paper examined the existence of the same trade-off between risk and return in the single-family housing market, and showed that the link still holds and provided empirical evidence in support of that theoretical result.
Abstract: The trade-off between risk and return in equity markets is well established. This paper examines the existence of the same trade-off in the single-family housing market. That market is dominated by homeowners, who constitute about two-thirds of U.S. households. For them the choice about how much housing and what house to buy is a joint consumption-investment decision. Furthermore, owner-occupied housing is by nature a lumpy investment whose risk cannot be completely diversified. Does this consumption-investment link negate the risk-return trade-off within the single-family housing market? Theory suggests the link still holds. This paper supplies empirical evidence in support of that theoretical result.
TL;DR: In this article, the optimal distribution of real estate ownership and lending will tend to be concentrated in taxable and nontaxable hands, respectively, with lending conducted via participating mortgages, and the violation of the well-known, risk-neutral valuation argument of the Black and Scholes (1973) model is demonstrated.
Abstract: This paper develops a micro-economic model and proceeds with numerical simulation to demonstrate that participating mortgages can improve social welfare when the real estate ownership is shared among the different taxable entities. The optimal distribution of real estate ownership and lending will tend to be concentrated in taxable and nontaxable hands, respectively, with lending conducted via participating mortgages. This paper also demonstrates the violation of the well-known, risk-neutral valuation argument of the Black and Scholes (1973) model because of the lack of a riskless hedge due to the uniqueness of real estate.
TL;DR: In this paper, the adjustment-grid method and the multiple-regression method are two most frequently used techniques in the sales comparison approach and it is shown that although both techniques provide unbiased estimators, the minimum-variance grid estimator should result in a smaller standard deviation than the multiple regression estimator.
Abstract: The adjustment-grid method and the multiple-regression method are the two most frequently used techniques in the sales comparison approach. This paper demonstrates that although both techniques provide unbiased estimators, the minimum-variance grid estimator should result in a smaller standard deviation than the multiple-regression estimator. A technique is also derived to estimate the confidence interval or to perform hypothesis tests for the minimum-variance grid estimator.
TL;DR: The authors developed a model of the market for commercial real estate loans based on the variables used by investors and lenders in property decision-making: the income capitalization (cap) rate, the debt-coverage ratio and the loan-to-value ratio.
Abstract: This paper develops a model of the market for commercial real estate loans based on the variables used by investors and lenders in property decision-making: the income capitalization (cap) rate, the debt-coverage ratio and the loan-to-value ratio. Empirical results for aggregate United States real estate originations and commitments for 1970–93 indicate that loan demand is sensitive to the cap rate and to building permit issuance. The dominant criterion used by lenders is the debt-coverage ratio as opposed to the loan-to-value ratio, a finding which may have implications for underwriting standards and credit policy.
TL;DR: In this paper, the authors model the costs associated with three distinct types of agency conflicts involved in closing an insolvent thrift, i.e., conflicts between creditors and owners, between owners and managers, and between taxpayers and government officials.
Abstract: Agency theory suggests that many of the costs incurred by the taxpayer during the 1980s thrift crisis were the result of conflicts between principals and their agents. This study models the costs associated with three distinct types of agency conflicts involved in closing an insolvent thrift—conflicts between creditors and owners, between owners and managers, and between taxpayers and government officials. Using a model that controls for sample-selection bias, the study presents strong evidence that thrift owners effected wealth transfers from creditors by undertaking high-risk investments, and that government officials pursued policies that increased losses to the thrift deposit insurance fund which ultimately were funded by the taxpayer. The results do not show that managers effected wealth transfers from owners through expense-preference behavior, but rather that inefficient management increased the losses of the deposit insurance fund.
TL;DR: The authors developed a linear regression model that explains over 80% of the cross-sectional variation in discounts across 60 real-estate limited partnership (RELPs) using characteristics of each partnership.
Abstract: A vexing problem for the appraisal industry has been estimating an appropriate discount for the value of real estate limited partnerships (RELPs) relative to their appraised value. This research develops a linear regression model that explains over 80% of the cross-sectional variation in discounts across 60 RELPs using characteristics of each partnership. Among a holdout sample of 41 RELPs, the model provides forecasts of discounts that are superior to assuming no discount or applying a mean discount to all partnerships. Discounts are greatest for RELPs with low current yields, low leverage and high trading ranges for their market prices.
TL;DR: In this paper, the authors describe empirical investigations of the geographical extent of office markets in the United States during the 1980s, and a mixed temporal autoregressive model was estimated for pooled downtown office markets and pooled suburban markets.
Abstract: This paper describes empirical investigations of the geographical extent of office markets in the United States during the 1980s. A mixed temporal autoregressive model was estimated for pooled downtown office markets and pooled suburban markets. Results indicate that while the temporal autoregressive effect is stronger for office market vacancies than is the effect of the national trend, their linkages to national trends are significant. However, a mixed spatial autoregression analysis of the data pooled over time indicates that the regional office vacancy effect is stronger than the national office vacancy effect in both downtown and suburban office markets.
TL;DR: In this article, the conditions under which borrowers select fixed and adjustable rate mortgages were investigated. And the effect of nominal and real shocks separately was analyzed in terms of the expected real interest rate differential, initial wealth, income, expected real and nominal income risk exposure.
Abstract: This paper concerns the conditions under which borrowers select fixed and adjustable rate mortgages. The novelty of the paper lies in its capability to analyze the effect of nominal and real shocks separately. The fixed rate mortgage (FRM) versus the adjustable rate mortgage (ARM) choice is determined by the expected real interest rate differential, initial wealth, income, expected real and nominal income risk exposure—measured by different parameters—the value of the house, the appreciation of the house and the influence of the variance of nominal and real shocks. Results differ according to whether or not borrowers are restricted by the loan-to-value constraint.