Housing Wealth, Housing Finance, and Tenure Choice in Korea
(with Jaehye Kim Han) Abstract
The Korean housing finance system is relatively illiquid with loan-to-values for borrowers ranging from 20% to 40%. This paper investigates the influence of financial constraints on tenure choice in Korea. A simple multinomial logit tenure specification is estimated. The amount of equity one has to put towards housing is found to be a dominant influence in the tenure decision. Additionally, the percentage of relatively low cost funds which come from the Korea Housing Bank is found to significantly increase the probability of being an owner.
Local Market and National Components in House Price Appreciation (with Richard Voith) Abstract
We analyze real home price appreciation using a long time series (1971–1989) and large cross section (56 metro areas). Our findings yield important new insights into two outstanding issues in real estate finance and economics. The first deals with the implications for investment opportunities in housing across metro areas. A striking result is that we cannot reject the null hypothesis of equal appreciation rates across locales. A priori, the results are suggestive of equal expected appreciation across the different local markets. However, it is noteworthy that we find significant serial correlation in some local appreciation series. This is consistent with previous findings by Case and Shiller and suggests that prescient market timers might have been able to make money in selective markets. We then consider the potential implications of equal appreciation rates across cities for housing market equilibrium in light of the fact that price levels do materially differ across metro areas. We argue that equal real appreciation rates starting from different price levels imply increasingly divergent prices of local traits in terms of foregone consumption. Without special assumptions with respect to income and productivity differentials across locations or to local trait income elasticities of demand, the appreciation rates in high housing price level areas ultimately have to fall below those in low price level areas. Preliminary evidence indicates that higher priced areas tend to have significantly lower appreciation rates (controlling for local fixed effects and a common, time-varying effect).
The Affordability of the American Dream: An Examination of the Last 30 Years (with Peter Linneman)
Analysis of the Changing Influences on Traditional Households’ Ownership Patterns (with Peter Linneman) Abstract
Sociological and economic forces have begun to alter ownership patterns in ways not yet captured by movements in the aggregate ownership rate. While demographic factors such as marital status and family structure remain influential in determining tenure choice, their impact has waned, particularly among the best educated households and those with rising real incomes. Labor market conditions, as evidenced by increasing returns to skill, are more strongly felt than ever before in the housing market. The impact on owning of being highly educated now rivals the influence of being married with minor children. Increasingly delayed ownership is a reality, even for traditional family units with 36- to 45-year-old heads that have not prospered in the labor market. The rising real cost of even relatively inexpensive suburban housing is also beginning to be reflected in a heightened impact for real family income on tenure choice. Finally, race currently is more adversely influential in determining suburban ownership for young, middle-aged minority families than it was in 1960, particularly if the household head is not well educated. We suspect this is due to racially disparate impacts of increasingly rigorous zoning regulations and higher impact fees in the suburbs.
The Changing Influences of Education, Income, Family Structure, and Race on Home Ownership by Age Over Time
Evaluating the Costs of Increased Lending in Low and Negative Growth Local Housing Markets (with Fang-xiong Gong) Abstract
The literatures on default and the evaluation of low down payment mortgage programs are extended by showing within an options pricing framework how differences in expected price appreciation trends across housing markets can influence default and, thereby, the cost of programs designed to increase mortgage liquidity. An equilibrium mortgage rate reflecting the risk premium required to compensate for expected default-related losses is endogenously determined within the model. Evaluating the entire process by which program losses arise strictly within a rigorous asset pricing framework has potentially important implications for policy evaluation, as the estimated present value of program losses in declining markets where expected default is high is quite sensitive to the choice of the discount rate. The implications of increased lending in low and negative price appreciation local markets are also investigated.
Analyzing the Relation Among Race, Wealth, and Home Ownership in America (with Peter Linneman and Susan M. Wachter)
The Spatial Distribution of Affordable Home Loan Purchases in Major Metropolitan Areas: Documentation and Analysis (with Dapeng Hu) Abstract
Analysis of twenty large metropolitan areas shows that the spatial distribution of purchases made by Fannie Mae and Freddie Mac in support of the Low- and Moderate-Income Housing Goal does not match the spatial distribution of low- and moderate-income households that apply for or take out a mortgage. Regression analysis then finds that both neighborhood traits and risk factors of goal-eligible applicants (or borrowers) are correlated with the degree of spatial mismatch between loan purchase activity and goal-eligible applications and originations. The most robust finding is consistent with a policy of the two GSEs targeting the purchase of Low- and Moderate-Income Housing Goal loans in relatively high income tracts. That is, the higher is a census tract’s income relative to the median for its metropolitan area, the higher is the GSE purchase rate in the tract relative to that for the overall metropolitan area. Race effects are somewhat less robust across metropolitan areas, with the bulk of the evidence suggesting that suburban, not central city, tracts with relatively high concentrations of African–American households are more likely to have relatively low GSE purchase rates of Low- and Moderate-Income Housing Goal loans. Finally, our analysis finds that a larger FHA presence is associated with a lower origination rate of conventional loans. We suspect that a stronger FHA presence increases the perceived risk of a neighborhood in most metropolitan areas, as FHA loans have a higher default risk.
The Spatial Distribution of Housing-Related Tax Benefits in the United States (with Todd Sinai) Abstract
We estimate how tax subsidies to owner-occupied housing are distributed spatially across the United States and find striking skewness. At the state level, the mean tax benefit per owned unit in 1990 ranged from $917 in South Dakota to $10,718 in Hawaii. The dispersion is slightly greater when benefit flows are measured at the metropolitan-area level. Even assuming the subsidies are funded in an income progressivity-neutral manner, a relatively few metro areas, primarily in California and the New York–Boston corridor, are shown to gain considerably while the vast majority of areas have relatively small gains or losses.
Reinvestment in the Housing Stock: The Role of Construction Costs and the Supply Side (with Todd Sinai) Abstract
While rational real estate entrepreneurs generally will not redevelop if asset values are below replacement costs, we investigate whether homeowners who have investment and consumption motivations behave similarly. We use a house’s average ratio of value-to-construction cost to proxy for the value-to-cost ratio of marginal investments in renovation and find a strong negative impact on housing reinvestment for units with ratios below one. Owners of homes with market values below replacement costs spend up to 50 percent less on renovation than do owners of similar homes with market values above construction costs. Given the economically meaningful impact on reinvestment in housing that we find, urban scholars and policy makers should begin to pay more attention to the supply side of the housing market.
Why Is Manhattan So Expensive? Regulation and the Rise in House Prices (with Edward Glaeser and Raven Saks) Abstract
In Manhattan, housing prices have soared since the 1990s. Although rising incomes, lower interest rates, and other factors can explain the demand side of this increase, some sluggishness in the supply of apartment buildings is needed to account for high and rising prices. In a market dominated by high-rises, the marginal cost of supplying more housing is the cost of adding an extra floor to any new building. Home building is a highly competitive industry with almost no natural barriers to entry, and yet prices in Manhattan currently appear to be more than twice their supply costs. We argue that land use restrictions are the natural explanation for this gap. We also present evidence that regulation is constraining the supply of housing in a number of other housing markets across the country. In these areas, increases in demand have led not to more housing units but to higher prices
Construction Costs and the Supply of Housing Structure (with Albert Saiz) Abstract
Construction costs account for the bulk of the price of new houses in most markets, but their study has been relatively neglected. We document that there are economically large differences in construction costs across U.S. housing markets. We also estimate a very elastic supply for physical structure; hence, differences in construction activity across markets do not explain the variation in costs. Supply shifters that collectively do account for differences in building costs include the extent of unionization within the construction sector, local wages, local topography in terms of the presence of high hills and mountains, and the local regulatory environment.
Using Home Maintenance and Repairs to Smooth Variable Earnings (with Joseph Tracy) Abstract
Recent research documents a significant increase in U.S. transitory income variance over the past 25 years. An emerging literature explores the role of durables in the household’s attempt to smooth consumption over these movements in transitory income. This paper examines the degree to which homeowners adjust their home maintenance decisions in order to offset transitory income fluctuations. American Housing Survey data show that home maintenance expenditures are economically significant, amounting to nearly $2,100 per year. We find a statistically significant positive elasticity of maintenance expenditures to estimated transitory income changes. However, the results suggest that adjusting home maintenance expenditures plays a relatively minor role in the household’s overall consumption smoothing strategy. In terms of actual dollars, deferred home maintenance offsets on average from 1 to 7 cents of each dollar of transitory income loss.
A New Measure of the Local Regulatory Environment for Housing Markets (with Albert Saiz and Anita A. Summers) Abstract
A new survey of over 2000 jurisdictions across all major housing markets in the US documents how regulation of residential building varies across space. New evidence on what a `typical’ degree of local regulation entails is provided. In addition, data on how the stringency of land use control varies across markets are analysed. Coastal markets tend to be more highly regulated, with communities in the Northeast region of America being the most highly regulated on average, followed by those in the West region (California especially).
Housing Supply and Housing Bubbles (with Edward Glaeser and Albert Saiz) Abstract
Like many other assets, housing prices are quite volatile relative to observable changes in fundamentals. If we are going to understand boom-bust housing cycles, we must incorporate housing supply. In this paper, we present a simple model of housing bubbles that predicts that places with more elastic housing supply have fewer and shorter bubbles, with smaller price increases. However, the welfare consequences of bubbles may actually be higher in more elastic places because those places will overbuild more in response to a bubble. The data show that the price run-ups of the 1980s were almost exclusively experienced in cities where housing supply is more inelastic. More elastic places had slightly larger increases in building during that period. Over the past five years, a modest number of more elastic places also experienced large price booms, but as the model suggests, these booms seem to have been quite short. Prices are already moving back towards construction costs in those areas.
Housing Busts and Household Mobility (with Fernando Ferreira and Joseph Tracy) Abstract
Using two decades of American Housing Survey data from 1985 to 2007, we revisit the literature on lock-in effects and provide new estimates of the impacts of negative equity and rising interest rates on the mobility of owners. Both lead to substantially lower mobility rates. Owners suffering from negative equity are one-third less mobile, and every added $1000 in real annual mortgage costs lowers mobility by about 12%. Our results cannot simply be extrapolated to the future, but they do have potentially important implications for policy makers concerned about the consequences of the housing bust that began as our data series ended. In particular, they indicate that we need to begin considering the consequences of lock-in and reduced household mobility because they are quite different from those associated with default and higher mobility.
Heterogeneity in Neighborhood-Level Price Growth in the U.S., 1993-2009 Abstract
Examination of detailed geographical information on U.S. housing transactions from 1993 to 2009 find much heterogeneity at the neighborhood level in when the recent boom began, how big the initial jumps in price growth were, how long the booms lasted, and what types of neighborhoods boomed first. There is less neighborhood-level heterogeneity in when the bust began and in aggregate price appreciation during the boom. This heterogeneity suggests that there was no one dominant cause of the boom. We also comment on how very local data may help understand the role of contagion, among other housing market phenomena.
Housing Mobility and Housing Busts: An Update (with Fernando Ferreira and Joseph Tracy) Abstract
Interest in the relationship between household mobility and financial frictions, especially frictions associated with negative home equity, has grown following the recent boom and bust in U.S. housing markets. With prices falling 30 percent nationally, negative equity greatly expanded across many markets. More recently, the decline in mortgage rates along with various policy interventions to encourage refinancing at historically low rates suggests the need to also revisit mortgage interest rate lock-in effects, which are likely to become important once Federal Reserve interest rate policy normalizes. In this article, the authors update their estimates (from Ferreira, Gyourko, and Tracy ) of the impact of three financial frictions—negative equity, mortgage interest rate lock-in, and property tax lock-in—on household mobility. By adding 2009 American Housing Survey (AHS) data to their sample, the authors incorporate the effect of more recent house price declines. They also create an improved measure of permanent moves in response to Schulhofer-Wohl’s (2011) critique of their earlier work. The authors’ updated estimates corroborate their previous results: Negative equity reduces household mobility by 30 percent, and $1,000 of additional mortgage or property tax costs lowers mobility by 10 to 16 percent. Schulhofer-Wohl’s finding of a zero or a slight positive correlation between mobility and negative equity appears to be due to a large fraction of false positives, as his coding methodology tends to misclassify almost half of the additional moves it identifies relative to the authors’ measure of permanent moves. This also makes his mobility measure dynamically inconsistent, as many transitions originally classified as a move are reclassified as a nonmove when additional AHS data become available. The article concludes by suggesting directions for future research, including potential improvements to measures of household mobility.
Superstar Cities (with Chris Mayer and Todd Sinai)
Housing Dynamics: An Urban Approach
(with Edward Glaesar, Eduardo Morales, and Charles Nathanson) Abstract
Journal of Urban Economics 81 2014: 45-56
A dynamic linear rational equilibrium model in tradition of Alonso, Rosen and Roback is consistent with many outstanding stylized facts of housing markets. These include: (a) that the markets are local in nature; (b) that construction persistence is fully compatible with mean reversion in prices; and (c) that price changes are predictable. Calibration exercises to match moments of the real data have notable successes and failures. The volatility in local income processes as reflected in HMDA mortgage applicant data can account for much of the observed price and construction volatility, except for the most inelastically supplied local markets. The model’s biggest failure lies in its inability to match the strong persistence in high frequency price changes from year to year.
Reconciling Theory and Empirics on the Role of Unemployment in Mortgage Default
(with Joseph Tracy) Abstract
Journal of Urban Economics, Vol. 80 (2014): 87-96
Empirical models of mortgage default typically find that the influence of unemployment is negligible compared to other well known risk factors such as high borrower leverage or low borrower FICO scores. This is at odds with theory, which assigns a critical role to unemployment in the decision to stop payment on a mortgage. We help reconcile this divergence by employing a novel empirical strategy involving simulated unemployment histories to measure the severity of attenuation bias in loan-level estimations of default risk due to a borrower becoming unemployed. Attenuation bias results because individual data on unemployment status is unobserved, requiring that a market-wide unemployment rate be used as a proxy. Attenuation is extreme, with our results suggesting that the use of an aggregate unemployment rate in lieu of actual borrower unemployment status results in default risk from a borrower becoming unemployed being underestimated by a factor more than 100. In addition, our analysis indicates that adding the unemployment rate as a proxy for the missing borrower-specific unemployment indicator does not improve the accuracy of the estimated model over the specification without the proxy variable included. Hence, aggregate portfolio-level risk estimates for mortgage guarantors such as FHA also are not improved. These views represent those of the authors and not necessarily those of the Federal Reserve Bank of New York or the Federal Reserve System. This is a revised version of a paper that previously circulated under the title “Unemployment and Unobserved Credit Risk in the FHA Single Family Mortgage Insurance Fund (NBER Working Paper No. 18880). John Grigsby provided excellent research assistance. We appreciate the helpful comments of Andrew Haughwout, Wilbert van der Klaauw, the editor (Stuart Rosenthal) and referees, but remain responsible for any errors.
Books and Monographs
Chapters in Books, Academic Reviews, etc
Controlling and Assisting Privately Rented Housing
Chapter 1 in Duncan Maclennan and Ruth Williams (Eds.), Housing Subsidies and the Market: An International Perspective, York, England: Joseph Rowntree Foundation Housing Finance Series, September 1990. (also reprinted in Urban Studies, Vol. 27, no. 6 (December 1990): 785-794.)
Urban Housing Markets
Chapter 5 (pp. 123-157) in Making Cities Work: Prospects and Policies for Urban America (R. Inman, editor), Princeton University Press, 2009.
Arbitrage in Housing Markets
Ch. 5 (pp. 113-146) in Housing and the Built Environment: Access, Finance, Policy (E. Glaeser and J. Quigley, eds.), Lincoln Land Institute of Land Policy, Cambridge: MA, 2010.
Housing Supply Abstract
Annual Review of Economics, Vol. 1 (pp. 295-318). Palo Alto, CA, 2009.
Research on housing supply has grown owing to improved data combined with heightened interest in policies such as local land use regulations. Heterogeneity in supply conditions across markets is shown to be essential to understanding the growing price dispersion across metropolitan areas, as well as to understanding whether positive growth shocks to a metropolitan area manifest themselves more in terms of expanding population and homebuilding or in terms of higher wages and house prices. The nature of supply obviously also influences local housing-market dynamics. Recent research has shown that differences in the elasticity of housing supply can account for the wide variation in new construction volatility (but not price volatility) across markets over time. The extraordinary nature of the recent boom only increases the need to understand how housing-market fundamentals and supply and demand affect the functioning of this huge asset market.
Regulation and Housing Supply
Chapter 19 (1289-1337) in Handbook of Regional and Urban Economics (edited by Gilles Duranton, J. Vernon Henderson and William Strange), Volume 5A, Elseveir, 2015, Amsterdam, The Netherlands