House Prices, Discount Rates and Taxes

Paper Session

Saturday, Jan. 7, 2017 10:15 AM – 12:15 PM

Sheraton Grand Chicago, Huron
Hosted By: American Real Estate and Urban Economics Association
  • Chair: Morris A. Davis, Rutgers University

Should We Be Taxed Out of Our Homes? The Optimal Taxation of Housing Consumption

David Albouy
,
University of Illinois-Urbana-Champaign

Abstract

Optimal tax theory suggests that it is more efficient to tax housing as a consumption good than other forms of consumption as it is a complement to leisure and is produced more intensively from land, an inelastic factor, than other goods. This tax rate appears to be at least 50 percent higher than other forms of consumption, justifying high rates of property taxation, particularly in areas with inelastic housing supply. It may be efficient to offer a lump sum transfer to households who choose to live close to high-paying jobs, justifying infra-marginal subsidies to housing units in some high-price areas. Proximity to amenities may also influence optimal tax rates depending on whether they are substitutes or complements to labor supply or housing consumption.

The Time Value of Housing: Historical Evidence on Discount Rates

Philippe Bracke
,
Bank of England
Ted Pinchbeck
,
London School of Economics and Political Science
James Wyatt
,
Royal Institution of Chartered Surveyors

Abstract

Most London housing transactions involve trading long leases of varying lengths. We exploit this to estimate the time value of housing the relationship between the price of a property and the term of ownership over a hundred years and derive implied discount rates. For our empirical analysis, we compile a unique historical dataset (1987 to 1992) to abstract from the right to extend leases currently enjoyed by tenants. Across a variety of specifications we find that leasehold prices are consistent with a time declining schedule and low long term discount rates in housing markets.

Local House Price Dynamics: New Indices and Stylized Facts

William Larson
,
Federal Housing Finance Agency
Alexander Bogin
,
Federal Housing Finance Agency
William Doerner
,
Federal Housing Finance Agency

Abstract

We construct the first large-scale panel of annual house price indices for cities, counties, 3-digit ZIP codes, and 5-digit ZIP codes in the United States from 1975 through 2015 using source data with nearly 100 million transactions. Appreciation rates decrease with distance from the central business district (CBD) in large cities, suggesting an overall increase in the desirability of housing units in these locations and a general steepening of the house price gradient. Real house prices are more likely to be non-stationary near the CBD than in the suburbs, a finding consistent with a higher elasticity of housing supply near the edge of the city. Sustained real price increases and high price volatility near the centers of large cities suggest a lower supply elasticity in these locations.

A Crisis of Missed Opportunities? Foreclosure Costs and Mortgage Modification During the Great Recession

Stuart Gabriel
,
University of California-Los Angeles
Matteo Iacoviello
,
Federal Reserve Board
Chandler Lutz
,
Copenhagen Business School

Abstract

This paper investigates the housing and broader economic effects of the 2000s crisis-period California Foreclosure Prevention Laws (CFPLs). The CFPLs encouraged lenders to modify mortgage loans by increasing the required time and pecuniary costs of foreclosure. Using the Synthetic Control Methodology, we find that the CFPLs prevented 335,000 California foreclosures, equivalent to a 30% reduction during the treatment period. These effects did not reverse after the conclusion of the policy, implying that the CFPLs were not a stopgap measure that simply delayed foreclosures until a later date. Our analysis also shows that the CFPLs increased house prices by 5 percent and in doing so created $250 billion of housing wealth. Findings further indicate that these gains in housing wealth did not translate into increased durable consumption as measured by auto sales. Disaggregated county and zip-code level estimates reveal that the CFPL house price increases were markedly higher in the hard hit areas of Southern California. Altogether, results suggest that the CFPLs were substantially more effective than the US Government’s HAMP Program in mitigating foreclosures and stabilizing the housing markets.
Discussant(s)
Martin Gervais
,
University of Iowa
Johamnes Strobel
,
New York University
Stephen D. Oliner
,
University of California-Los Angeles
Erik Hembre
,
University of Illinois-Chicago
JEL Classifications
  • C4 - Econometric and Statistical Methods: Special Topics
  • R1 - General Regional Economics