Urban Economic Issues

Paper Session

Friday, Jan. 6, 2017 2:30 PM – 4:30 PM

Sheraton Grand Chicago, Erie
Hosted By: American Real Estate and Urban Economics Association
  • Chair: Daniel McMillen, University of Illinois-Urbana-Champaign

Financial Crisis and the Increase of Income Inequality Across Cities

Jung Choi
,
University of Southern California
Richard Green
,
University of Southern California

Abstract

This paper investigates how the financial crisis affected the level of income inequality across U.S. cities. Following the crisis, some MSAs experienced a sharper increase in income inequality than others. Using the American Community Survey (ACS) from 2005 to 2013, we explore whether cities that experienced a greater drop in house prices experienced a greater increase in income inequality. Next, we further whether the disparities in the level and the changes in the level of inequality can be explained by MSA characteristics, including labor market conditions, skill distribution, residential mobility, racial concentration, industrial composition and unionization. We also examine how state level policies such as unemployment insurance benefits and minimum wage level is associated with income inequality. Our findings shows cities that experienced a greater house price drop showed a greater increase in income inequality as unemployment of members of low income households’ increase more than that of the high income households. Even after controlling for the house price shock, we find that concentration of skilled workers and racial segregation are positively associated with the level of income inequality. The level of inequality in these cities also tends to rise grow at a faster pace. While the minimum wage do not seem to have any association with income inequality, we find some evidence that the unemployment insurance benefit and percent of union members lower the increase in the income inequality.

Analyst Expectations, and Actual Performance of Regional Economies With and Without FOMC Representation

Crocker Liu
,
Cornell University
Edward Coulson
,
University of California-Irvine
Sriram Villupuram
,
University of Texas-Arlington

Abstract

We 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

Jeffrey P. Cohen
,
University of Connecticut
Yannis Ioannides
,
Tufts University

Abstract

This 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

Abdullah Yavas
,
University of Wisconsin-Madison
Lingxiao Li
,
Longwood University

Abstract

In 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.
Discussant(s)
David Albouy
,
University of Illinois-Urbana-Champaign
Tien Foo Sing
,
National University of Singapore
Zackary Hawley
,
Texas Christian University
Kristopher Gerardi
,
Federal Reserve Bank of Atlanta
JEL Classifications
  • R1 - General Regional Economics
  • R2 - Household Analysis