Urban Economic Issues
Friday, Jan. 6, 2017 2:30 PM – 4:30 PM
Sheraton Grand Chicago, Erie
- Chair: Daniel McMillen, University of Illinois-Urbana-Champaign
Analyst Expectations, and Actual Performance of Regional Economies With and Without FOMC Representation
AbstractWe examine the relation between the expected growth of an urban economic base when it is represented by a member on the Federal Open Market Committee (FOMC). We create and employ new forward-looking financial growth indices that measure the urban economic strength of an MSA and find that the predicted earnings is 44% higher when there is a representative for the region on the FOMC. The membership rotation to the FOMC is announced three years in advance. Therefore the markets should have no reaction to the membership changes to the FOMC when it actually takes effect.
International Trade, Intercity Trade, and Housing Prices in United States Cities
AbstractThis paper outlines a basic model of an economy made up of cities engaged in intercity and in international trade, and explores predictions it offers for structuring an empirical investigation. It proposes a set of two equations, which may be estimated individually or as simultaneous system of equations. The first of these equations follows from imposing spatial equilibrium across the system of cities; the second of the equations expresses the role of exports, domestic and/or international, in the determination of city GDP. The paper reviews the data and explains their potential for estimating the above two equations. The paper presents a set of tentative estimation results and concludes briefly with a review of additional research in progress. To the best of our knowledge, our approach is completely novel. We are unaware of any previous use of the intercity trade data nor of the international exports data for the purpose of estimating city GDP determination. In addition to exploring a lot of structural detail, we plan to study how international export-oriented cities differ from other domestic export-oriented cities. In addition to identifying possibly structural differences across such cities, we are exploring the interdependence between international asset markets and local housing markets. Although housing is the proverbial non-traded good, claims to housing assets are widely traded. Furthermore, there exist extensive international investment in US commercial and residential real estate markets. This may have consequences for the nature of shocks affecting certain US housing markets.
Land Value and Mortgage Delinquency
AbstractIn assessing the riskiness of a mortgage loan, one of the primary underwriting criteria used by lenders as well as one of the macro-prudential measures used by policy makers is the LTV ratio at the time of origination. This ratio is critical because it determines the probability of a default and the magnitude of the loss the lender will face in the case of a default.
In this paper, we address mortgage default from a new perspective: instead of focusing on the overall property value, we separate land value from building value, and focus on the role of land share of the overall property value as a determinant of default risk. Using new property level data for properties sold in Orange County, California, between 2005 and 2015, we show that when land share increases by 10 percentage points, the probability of default increases by 1.54 percentage points. The primary explanation is that land value is more volatile than the improvements value. Thus, when housing markets experience a negative demand shock, properties with a higher land share experience a higher default risk. The implication of this result for the players in the mortgage industry and for policy makers is that, in order to have the same default rate, a property with a higher land share needs to have a lower LTV. Our results also suggest that macro-prudential measures on LTV restrictions will be more effective if they focus more on the land component of the property value. Lenders and policy makers can improve performance of mortgage loans if they employ property-specific LTV ratios that are a function of that property’s land share, rather than setting uniform LTV standards across properties.
University of Illinois-Urbana-Champaign
Tien Foo Sing,
National University of Singapore
Texas Christian University
Federal Reserve Bank of Atlanta
- R1 - General Regional Economics
- R2 - Household Analysis