Showing papers in "Real Estate Economics in 2009"
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TL;DR: In this article, the authors consider why housing market conditions, including the ratio of buyers to sellers, expected time-to-sale and transaction prices, are sensitive to the fundamentals.
Abstract: This article considers why housing market conditions, including the ratio of buyers to sellers, expected time-to-sale and transaction prices are sensitive to fundamentals These high sensitivities result from feedback: market participants optimally respond to shocks in a manner that amplifies a shock's initial impact, which in turn elicits further reinforcing responses For example, a positive demand shock brings more buyers into a market This improves the bargaining position of sellers, who then sell more quickly, decreasing the stock of sellers in the market This further increases the relative number of buyers to sellers, amplifying the initial shock
210 citations
TL;DR: In this paper, the authors argue that the estimated foreclosure coefficients in most of the previous research are upward biased because they do not control for variables such as the physical condition of the property and the relationship between marketing time and price.
Abstract: ∗∗∗ Most previous empirical research estimates a greater than 20% discount associated with the sale of foreclosed properties. Under the assumption that the real estate market is somewhat efficient, such a large discount would be counterintuitive. We argue, and empirically show, that the estimated foreclosure coefficients in most of the previous research are upward biased because they do not control for variables such as the physical condition of the property and the relationship between marketing time and price. Accounting for these factors and correcting for two types of spatial price interdependence, our results show that estimates of foreclosure discount reported by previous studies are about one-third higher than the true discount caused by foreclosure per se. To date there have been several research efforts designed to estimate the effect of foreclosure status on the price of single-family residences. Generally, the empirical results have revealed about a 20% discount associated with foreclosure status. However, it is often not clear whether researchers claim the discount is due to a “stigma effect” of foreclosure or a “proxy effect” for other property characteristics. A stigma effect refers to a discount for no other reason than the status of the property as foreclosed. No characteristics of the property differentiate foreclosed from nonforeclosed properties. Potential buyers see the foreclosure as a stigma, purchase the property with a large discount and resell it immediately, capturing a large windfall. The real estate market, however, while not perfectly efficient, is not likely to be so inefficient as to allow for such excess returns. Even if foreclosed properties are offered by motivated sellers, competition among buyers would mitigate opportunities for excess returns. The proxy effect refers to a discount because a foreclosed property may have other characteristics that affect price negatively, such as deteriorated physical condition and/or neighborhood characteristics. In this article, we develop a
136 citations
TL;DR: In this paper, the authors examine how the predictability of real estate returns affects the risk of, and optimal allocations to, real estate for investors of differing investment horizons, and find that real estate investment trusts are a redundant asset class for investors with access to direct real estate as an asset class.
Abstract: We examine how the predictability of real estate returns affects the risk of, and optimal allocations to, real estate for investors of differing investment horizons. Returns to direct real estate are mean reverting, and risk decreases with horizon. This is driven by a tendency for property transaction prices to overshoot inflation. Mean reversion in real estate returns is weaker than that of equities, resulting in real estate having similar risk to equities for long-term investors. However, optimal portfolios have large allocations to direct real estate at all horizons, and the allocation increases with horizon. Finally, we find that real estate investment trusts are a redundant asset class for investors with access to direct real estate as an asset class, but they do have a role in optimal allocations when direct property investment is not feasible.
127 citations
TL;DR: In this paper, the authors developed a new measure of area affordability that characterizes the supply of housing that is affordable to different households in different locations of a metropolitan region, and developed an affordability methodology that accounts for job accessibility, school quality and safety.
Abstract: The recent slump notwithstanding, substantial increases in house prices in many parts of the United States have served to highlight housing affordability for moderate-income households, especially in high-cost, supply-constrained coastal cities such as Boston. In this article, we develop a new measure of area affordability that characterizes the supply of housing that is affordable to different households in different locations of a metropolitan region. Key to our approach is the explicit recognition that the price/rent of a dwelling is affected by its location. Hence, we develop an affordability methodology that accounts for job accessibility, school quality and safety. This allows us to produce a menu of town-level indexes of adjusted housing affordability. The adjustments are based on obtaining implicit prices of these amenities from a hedonic price equation. We thus use data from a wide variety of sources to rank 141 towns in the greater Boston metropolitan area based on their adjusted affordability. Taking households earning 80% of area median income as an example, we find that consideration of town-level amenities leads to major changes relative to a typical assessment of affordability.
102 citations
TL;DR: The authors revisited the empirical question of the determinants of the choice between …xed-and adjustable-rate mortgages using more comprehensive data from the Survey of Consumer Finances (SCF) that overcome some of the data limitations in previous studies.
Abstract: This study revisits the empirical question of the determinants of the choice between …xed- and adjustable-rate mortgages using more comprehensive data from the Survey of Consumer Finances (SCF) that overcome some of the data limitations in previous studies. The results from a Logit model of mortgage choice indicate that pricing variables and aordability are important considerations. We also …nd that factors such as mobility expectations, income volatility, and attitudes toward …nancial risk largely in‡uence mortgage choice, with more risk-averse borrowers preferring …xed-rate mortgages. For households that are less risk averse, the mortgage type choice decision is less sensitive to pricing variables and income volatility, and aordability factors are not signi…cant. These …ndings provide empirical support that underscore the importance of attitudes toward risks in mortgage choice.
91 citations
TL;DR: In this paper, the authors reexamine the results of two of the most prominent studies using the Panel Study of Income Dynamics, Public Use Microsample, and National Longitudinal Survey of Youth data and find that the beneficial effects of homeownership previously measured are substantially reduced or eliminated by controlling for these factors.
Abstract: Recent studies have concluded that homeownership is beneficial to children. This result is important because it is used to justify large government subsidies that encourage homeownership. We reexamine the results of two of the most prominent of these studies using the Panel Study of Income Dynamics, Public Use Microsample, and National Longitudinal Survey of Youth data. We extend this research by controlling for residential mobility, wealth, dwelling type and vehicle ownership, as well as by using a “differences in differences” methodology to deal with possible treatment effects bias. We find that the beneficial effects of homeownership previously measured are substantially reduced or eliminated by controlling for these factors. We confirm these results using data from the Early Childhood Longitudinal Study.
76 citations
TL;DR: In this article, investment and liquidity management are analyzed in a sector in which firms are exogenously cash constrained, and empirical estimates of Tobin's q provide reliable measures of investment opportunity.
Abstract: ∗∗∗ Investment and liquidity management are analyzed in a sector in which firms are exogenously cash constrained and empirical estimates of Tobin’s q provide reliable measures of investment opportunity. Across the entire sector, we document substantial realized investment as well as high investment sensitivity to q. Investment is also sensitive to measures of financial market frictions, suggesting that constraints on retention of cash flow distort investment decisions. Liquidity is managed through dividend policy and access to short-term bank finance, in which bank lines of credit smooth variation in available cash flow and accelerate investment. Using the Kaplan‐Zingales method for measuring the degree of financial constraint, we identify substantial differences between investment and liquidity management policies of firms, in which more (less) financially constrained firms in our sample exhibit high (low) investment and liquidity management sensitivity to variables that measure financial market frictions. This study analyzes investment by firms organized as real estate investment trusts (REITs). REITs generally hold ownership interests in commercial real estate assets and are required to pay out at least 90% of their taxable income as dividends, implying that the entire sector is constrained in its ability to retain cash. 1 Table 1 shows that from 1990 through 2003 REITs paid higher dividends with less resulting net cash flow and a lower stock of cash than nonREIT corporations, which have no formal requirements to pay out income as dividends.
76 citations
TL;DR: In this article, the authors investigate the reasons for variations in price changes among houses within a market and draw on three theories for guidance, one related to the optimal search strategy for sellers of atypical dwellings, another focusing on the bargaining process between a seller and potential buyers, and the third relying on the concept of land leverage.
Abstract: While the average change in house prices is related to changes in fundamentals or perhaps market-wide bubbles, not all houses in a market appreciate at the same rate. The primary focus of our study is to investigate the reasons for these variations in price changes among houses within a market. We draw on three theories for guidance, one related to the optimal search strategy for sellers of atypical dwellings, another focusing on the bargaining process between a seller and potential buyers, and the third relying on the concept of land leverage. We hypothesize that houses will appreciate at different rates depending on the characteristics of the property and the change in the strength of the housing market. These hypotheses are supported using data from three New Zealand housing markets.
75 citations
TL;DR: In this article, the authors apply the spatiotemporal hedonic approach to the analysis of office transaction prices in the Paris property market (i.e., central Paris and its inner suburbs).
Abstract: This article applies the spatiotemporal hedonic approach to the analysis of office transaction prices in the Paris property market (i.e., central Paris and its inner suburbs). The analysis focuses primarily on the market's two main business districts (the Central Business District and the La D'efense District). We find that spatial and temporal dependence effects are strongly present in these submarkets. Additionally, we propose a hybrid method for incorporating a temporal regime switch into the spatiotemporal autoregressive model. The regime switching around 1997 (i.e., in the presence of temporal heterogeneity) substantially affects the significance of spatial and temporal dependences. Finally, we build a new price index that incorporates both spatiotemporal dependences and temporal heterogeneity. This index differs strongly from the usual hedonic price index.
57 citations
TL;DR: In this article, the degree of interdependence among the securitized property markets of six major countries and the United States was examined, and it was shown that from the perspective of the U.S. investor the markets of the Netherlands and France provided the greater diversification benefits.
Abstract: This article examines the degree of interdependence among the securitized property markets of six major countries and the United States. Long-run results indicate that, over a period beginning January 1990 and ending August 2007, the property markets of Australia, Hong Kong, Japan, the United Kingdom and the United States are tied together, implying that from the perspective of the U.S. investor the markets of the Netherlands and France provide the greater diversification benefits. Further, the United States and Japan are found to be the sources of the common trends, suggesting that the two larger property markets lead the five (cointegrated) markets toward the long-run equilibrium relationships.
57 citations
TL;DR: In this paper, the authors examined the impacts of one of the more prominent economic development tools, tax increment financing (TIF) districts, on the local commercial real estate market and found that commercial properties located within designated TIF districts exhibit higher rates of appreciation after the area is designated a qualifying TIF district.
Abstract: ∗The analysis in this article examines the impacts of one of the more prominent economic development tools, tax increment financing (TIF) districts, on the local commercial real estate market. The study area is the city of Chicago, a community with a long history of reliance on TIF districts as a means to foster local development initiatives. A treatment effects model is used to address the selection bias often attributed to studies of public policy impacts on real estate markets. The results indicate that commercial properties located within designated TIF districts exhibit higher rates of appreciation after the area is designated a qualifying TIF district.
TL;DR: In this article, the authors investigated the magnitude and determinates of share liquidity over the 1990-2007 period in the world's four largest securitized real estate markets: the United States, the United Kingdom, Continental Europe and Australia.
Abstract: ∗∗∗ ∗∗∗ This article investigates the magnitude and determinates of share liquidity over the 1990–2007 period in the world’s four largest securitized real estate markets: the United States, the United Kingdom, Continental Europe and Australia. We document a significant and consistent role for market capitalization, nonretail share ownership and dividend yield as drivers of liquidity across markets. We also document significant differences in liquidity across countries and between property and nonproperty companies. Also striking is the lack of correlation among our three measures of liquidity across property firms and time. This supports the notion that share price liquidity is multifaceted and therefore reliance on any one measure of liquidity in empirical work may produce misleading conclusions. Although we find some evidence of a connection between liquidity and firm value, it is less conclusive than prior studies.
TL;DR: In this article, the authors examined the short and long-run dynamics among institutional capital flows and returns in private real estate markets and found that lagged institutional flows significantly influence subsequent returns.
Abstract: This article examines the short- and long-run dynamics among institutional capital flows and returns in private real estate markets. At the aggregate U.S. level, we find evidence that lagged institutional flows significantly influence subsequent returns. When disaggregating by property type at the national level, we find that capital flows predict subsequent returns in the apartment and office sectors, but not in the retail and industrial markets. At the metropolitan level, we find that the flows help explain subsequent returns in a limited number of core business statistical areas (CBSAs), although these CBSAs collectively represent about 30% of institutional capital. We find no evidence that institutional returns are predictive of future capital flows at the national or CBSA level, suggesting that institutional investors are not chasing returns.
TL;DR: This paper found that proximity to other homeowners belonging to a family's social network improves access to information about how to become a homeowner, and that these patterns hold regardless of the Hispanic family's own ability to speak English.
Abstract: As of the fourth quarter of 2007, 74.9% of white non-Hispanic families but only 48.5% of Hispanic families owned homes. We argue that low rates of homeownership in Hispanic communities create a self-reinforcing mechanism that contributes to this large disparity. In part, this occurs because proximity to other homeowners belonging to a family's social network improves access to information about how to become a homeowner. Role model effects may also be relevant. We investigate these issues using household-level data on out-of-state movers from the 2000 Decennial Census. Three especially important results are obtained. First, proximity to Hispanic homeowners in the 1995 place of residence increases the propensity of a Hispanic family to own a home in 2000. Second, that effect is especially strong with respect to proximity to weak English-speaking Hispanic homeowners. Third, these patterns hold regardless of the Hispanic family's own ability to speak English. From a policy perspective, these results suggest that local programs designed to promote homeownership among weak English-speaking Hispanic families likely increase Hispanic homeownership beyond just the immediate program participants.
TL;DR: In this paper, the authors examined the relationship between overinvestment in audit services, abnormal nonaudit fees paid to the auditor and market-based measures of firm transparency and found that the capital markets reward REITs that overinvest in audit service with better liquidity as measured by bid-ask spreads.
Abstract: ∗∗∗ ∗∗∗ ∗∗∗∗ This article examines the relationship between overinvestment in audit services, abnormal nonaudit fees paid to the auditor and market-based measures of firm transparency. Because real estate investment trusts (REITs) must distribute 90% of their earnings as dividends, many are repeat participants in the seasoned equity market. Thus, REITs have unusually strong incentives to strive for security market transparency. We find that the capital markets reward REITs that overinvest in audit services with better liquidity as measured by bid-ask spreads. However, firms with abnormally high nonaudit expenditures appear to be penalized with wider spreads, consistent with the notion that such fees may compromise auditor independence.
TL;DR: This article found that borrowers with higher refinancing costs self-select into mortgages with higher point/lower-rate (lower-point/higher-rate) loans, and when they do, they take longer to refinance.
Abstract: Utilizing individual mortgage data, we find that borrowers with points are less likely to refinance, and when they do, they take longer to refinance. This finding supports the separating equilibrium prediction of earlier studies that borrowers with higher (lower) refinancing costs self-select into mortgages with higher-point/lower-rate (lower-point/higher-rate) loans.
TL;DR: This paper showed that diversification into REITs increases both the Sharpe ratio and the certainty equivalent of wealth for all investment horizons and for both classical and Bayesian (who account for parameter uncertainty) investors.
Abstract: Welfare gains to long-horizon investors may derive from time diversification that exploits non-zero intertemporal return correlations associated with predictable returns. Real estate may thus become more desirable if its returns are negatively serially correlated. While it could be important for long horizon investors, time diversification has been mostly investigated in asset menus without real estate and focusing on in-sample experiments. This paper evaluates ex post, the out-of-sample gains from diversification when equity REITs belong to the investment opportunity set. We find that diversification into REITs increases both the Sharpe ratio and the certainty equivalent of wealth for all investment horizons and for both classical and Bayesian (who account for parameter uncertainty) investors. The increases in Sharpe ratios are often statistically significant. However the out-of-sample average Sharpe ratio and realized expected utility of long-horizon portfolios are frequently lower than that of a one-period portfolio, which casts doubt on the value of time diversification.
TL;DR: In this article, the authors put together a database of 86 repeat-sales transactions for office properties in lower and mid-town Manhattan spanning the years from 1899 to 1999, using this very limited database, decade-interval changes in real property prices are estimated with varying degrees of precision.
Abstract: This article is able to put together a database of 86 repeat-sales transactions for office properties in lower and midtown Manhattan spanning the years from 1899 to 1999. Using this very limited database, decade-interval changes in real property prices are estimated—with varying degrees of precision. Our conclusions are two fold. First, adjusting for inflation, commercial office property values were 30% lower in 1999 than they were in 1899. Second, within any decade values often rise and fall by 20–50% in real terms. With these results, the long-term historic return to New York commercial property must mostly comprise yield with capital gains limited to general inflation. Other historical studies consistent with this conclusion are reviewed.
TL;DR: This paper used a sample of young renters from the Panel Study of Income Dynamics and a continuous-time econometric model to explore not only the initial tenure transition to first-time homeownership, but also subsequent possible tenure transitions to a second owned home, back to rental tenure and, indirectly, to another owned home from rental tenure.
Abstract: This article uses a sample of young renters from the Panel Study of Income Dynamics and a continuous-time econometric model to explore not only the initial tenure transition to first-time homeownership, but also subsequent possible tenure transitions to a second owned home, back to rental tenure and, indirectly, to a second owned home from rental tenure. Once estimated, the predicted probabilities of these transitions are used to calculate the probability of homeownership at various times for households in the sample. These estimates are done separately for African Americans and whites for two different 11-year time intervals, 1987–1997 and 1993–2003. A primary result is that if African American education, income, net wealth and savings behavior could be brought in line with that of white households the majority of the racial gap in homeownership could be eliminated in either time period.
TL;DR: In this paper, the authors examined the rent effects of office clustering in the Amsterdam office market for the period 2000-2005 and found that the vicinity of other office objects is priced into rent levels, regardless of market conditions.
Abstract: This article examines the rent effects of office clustering in the Amsterdam office market for the period 2000–2005. We isolate the rent effects of location density based on geographic information system (GIS) methodology, while controlling for variations in object characteristics in a cross-sectional hedonic model. While controlling for the age, location and quality of the object, we find a strong positive effect of being located in dense office areas. We find that the vicinity of other office objects is priced into rent levels, regardless of market conditions. This article extends existing literature by examining the influence of clustering outside the United States, during changing economic tides and by application of novel methodology, based on objective clustering schemes, which can be replicated for other geographic areas.
TL;DR: In this paper, a survey of 8,450 U.S. real estate agents showed that a year of experience raises the full-time hourly wage by 2.5% and the conditional hours worked decline by 0.6%.
Abstract: Real estate agents have flexibility in choosing hours and employers. These responses are tested with a five-equation recursive model. Agents choose between full- and part-time work. The conditional wage measures productivity adjusted for self-selection to each status. Hours worked in each status depend on the fitted after-tax wage and household income, yielding flexible supply elasticities. Using a 2005 survey of 8,450 U.S. real estate agents, a year of experience raises the full-time hourly wage by 2.5%. Conditional hours worked decline by 0.6%, implying an earnings return of 1.9% per year of experience. The labor supply elasticity for full-time agents is 0.21; it is almost zero for part timers.
TL;DR: In this article, the authors tried to test the above hypothesis using 10-year freehold and leasehold housing transaction data in Hong Kong and Singapore, where different political scenarios, comparable land lease structures as well as similar property cycles were established during the period.
Abstract: Political instability may weaken investors' belief in property rights, putting the investors in fear that part of the investment may be wasted due to poor protection. As a result, the investors are unwilling to pay a premium for the security of rights when facing political uncertainty. This article attempts to test the above hypothesis using 10-year freehold and leasehold housing transaction data in Hong Kong and Singapore, where different political scenarios, comparable land lease structures as well as similar property cycles were established during the period. The conceptual model yields testable predictions about our hypotheses, and the empirical results verify the predictions.
TL;DR: In this paper, the authors developed hypotheses regarding the incidence of this tax by income class and racial group within these areas and found that, while the tax rises with a household's permanent income, this rise is less than proportional, making it a regressive tax.
Abstract: ∗∗∗ ∗∗∗ Land use regulation has been found to impose a substantial tax on housing within select U.S. metropolitan areas. In this article, we develop hypotheses regarding the incidence of this tax by income class and racial group within these areas. Parcel-level data from Miami-Dade County, Florida, are used to test our hypotheses. We find that, while the tax rises with a household’s permanent income, this rise is less than proportional, making it a regressive tax. We also find, controlling for household permanent income, that the tax is a higher percentage of the price of homes located in black neighborhoods in comparison to those located in white or Hispanic neighborhoods. The recent rapid rise in housing prices within many local housing markets in the United States has rekindled interest in the effect that land use regulation has on residential developers’ costs. This issue has been difficult to study because the regulatory environments of local housing markets are complex, idiosyncratic and can be greatly affected by planners’ administrative discretion, which in turn is affected by local politics and “NIMBYism.” 1 Within these environments, the lion’s share of developers’ regulatory costs, which anecdotal evidence suggests can be quite substantial, is best characterized as the outcome of case-by-case bargaining sessions between the developer and a planner (or planners). These costs are myriad in nature and consist of (1) permit fees; (2) compliance costs incurred in the preparation of various reports required for project approval; (3) exactions, which can take several forms, including impact fees and payments-in-kind made by the developer to improve the community’s public infrastructure; and (4) project approval time costs. With the exception of statutorily defined permit fees, all of the other costs, which are generally much
TL;DR: In this paper, the authors compute equity-based real after-tax rates of return for homeowners and landlords in the United States for 1952-2005 and show that a combined aggregate for residential housing provides a high average net return and low volatility, has low correlation with financial assets and can provide hedge against inflation.
Abstract: We compute equity-based real after-tax rates of return for homeowners and landlords in the United States for 1952–2005. The study confirms that a combined aggregate for residential housing provides a high average net return and low volatility, has low correlation with financial assets and can provide hedge against inflation. The efficient frontier analysis shows that the optimal portfolio for a household with a coefficient of relative risk aversion of four to five is one which contains a bit larger amount of housing than stocks, close to what one observes in the real world.
TL;DR: The American Real Estate and Urban Economics Association (AREUEA) was created in the mid-1960s by a few academics interested in promoting real estate research as discussed by the authors, and has become a highly respected international association of real estate academics and researchers employed by industry and governments.
Abstract: This article summarizes the 45-year history of the American Real Estate and Urban Economics Association (AREUEA). It describes how AREUEA was created in the mid-1960s by a few academics interested in promoting real estate research. It tracks the Association's growth into a highly respected international association of real estate academics and researchers employed by industry and governments. The article also examines the activities of its members: officers elected, awards presented, conferences organized and scholars' contributions to its main academic publication—Real Estate Economics. The article identifies the most prolific contributors to the Journal (located both in the United States and internationally) and the impact that the Journal's publications have had on real estate research. Finally, we describe how real estate research interests have changed over time.
TL;DR: In this article, the authors estimate the equity marginal q for real estate-managing public corporations, namely, real estate investment trusts (REITs), in an attempt to understand how the various costs and benefits of being a public corporation play a role in managing this important asset class.
Abstract: ∗∗∗ Equity marginal q is the change in the market value of a company’s equity in response to a one-unit unexpected change in its asset base. Hence, it is a profitability index that evaluates a firm’s capital budgeting decisions at the margin. We estimate the equity marginal q for real estate–managing public corporations, namely, real estate investment trusts (REITs), in an attempt to understand how the various costs and benefits of being a public corporation play a role in managing this important asset class. Using the universe of equity REITs for the period from 1993 to 2005, we find that REITs with greater idiosyncratic volatility, higher stock turnover and smaller bid-ask spread have a higher equity marginal q. In addition, both the holdings of institutional investors and their investment horizons are respectively positively related to equity marginal q. With these firm characteristics taken into account, firm size is found to be negatively related to equity marginal q. Our findings are economically important as well, because the equity marginal q ratio alone accounts for approximately one-third of the total REIT shareholder wealth change during the study period. Real estate is an important asset class in the economy. Not only does real estate account for a large fraction of the national wealth and consumption (Mills 1987, Hendershott 1989), but investing in real estate is also known to lead the business cycle (Green 1997). As another indication of real estate’s importance in the economy, many investors have exposure to income-producing real estate by using it as a portfolio diversification tool to take advantage of its low correlation with other assets. Consequently, it is crucial to understand how this asset class is invested and managed in the economy.