Real Estate Markets
Friday, Jan. 6, 2017 2:30 PM – 4:30 PM
Hyatt Regency Chicago, Michigan 3
- Chair: Vincent Yao, Georgia State University
Geographic Heterogeneity in Housing Market Risk and Portfolio Choice
AbstractThe U.S. housing market is heterogeneous in that house price dynamics vary greatly across regions, the housing supply elasticity being the main explanator. Households are exposed to completely different housing market risk, depending on the location of the main residence. This paper examines how geographic heterogeneity in housing market risk affects household portfolio allocations. Using the restricted version of the Health and Retirement Study (HRS) data with detailed geographic information, I find that households in areas with low housing supply elasticity tend to hold less stock in their portfolios. This tendency, however, weakens after retirement when labor income risk disappears.
History Dependence in the Housing Market: Facts and Explanations
AbstractUsing the universe of housing market transactions in England and Wales in the last twenty years, we document a robust pattern of history dependencein housing markets. Sale prices and selling probabilities today are affected by aggregate house prices prevailing in the period in which properties were previously bought.
We investigate the causes of history dependence, with its quantitative implications for the post-crisis recovery of the housing market. To do so we complement our analysis with administrative data on mortgages and online house listings, which we match to actual sales. We find that high leverage in the pre-crisis period and anchoring (or reference dependence) both contributed to the collapse and slow recovery of the volume of housing transactions. We find no asymmetric effects of anchoring to previous prices on current transactions; in other words, loss aversion does not appear to play a role over and above simple anchoring.
The Housing Crisis and the Rise in Student Loans
AbstractThe ﬂow of new student loans increased by 50% between 2007 and 2010, and the amount borrowed per student also rose by about a third. This shift occurred during the Financial Crisis, while credit markets were disrupted, and home prices fell by about a third nationwide. In this paper, we explore whether these two phenomena are linked, and in particular, whether the decline in home equity caused households to shift the responsibility for education ﬁnancing to students in the form of loans. Student loans were one of the few forms of credit that remained accessible throughout the crisis. We estimate that for every dollar of home equity lost, households increase student loan debt by forty to sixty cents. This substitution appears to be driven primarily by households with low levels of liquid assets. We extend our analysis using credit bureau data to trace longer-run eﬀects of this leverage on students. Our results show that constrained households generally continued to enroll in college, but switched to student loan ﬁnancing. Our quantitative estimates suggest that the 30% average decline in house prices
resulted in $1300 in additional student borrowing on average, per student, though the estimated eﬀects are larger for liquidity-constrained and less-educated households. This channel explains 38% of the change in student loan debt within our sample.
Mortgage Design in an Equilibrium Model of the Housing Market
AbstractAbstract How can mortgages be redesigned or modified in a crisis to reduce housing market volatility, consumption volatility, and default? How does mortgage design interact with monetary policy? We answer these questions using a quantitative general equilibrium life cycle model with aggregate shocks, realistic long-term mortgages, and a housing market that clears in equilibrium. We find that while FRMs have higher long-run consumption and more stable payments, ARMs provide important hedging benefits in a crisis by reducing payments when income is falling if the central bank lowers interest rates in crisis states. This reduces default and short circuits a price-default spiral, dramatically reducing price declines. The welfare benefits of ARMs in a crisis are large – equivalent to 30 percent of a year of consumption over an eight year crisis – because ARMs dramatically help young, high LTV households who face severe liquidity constraints. The overall benefits of ARMs also depend on the extent to which agents anticipate these hedging benefits and take on more risky debt positions in response. Our comparison of FRMs and ARMs more broadly suggests that adding state contingency to mortgage designs can dramatically alleviate housing crises.
- R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location