Real Estate Markets

Paper Session

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

Hyatt Regency Chicago, Michigan 3
Hosted By: American Economic Association
  • Chair: Vincent Yao, Georgia State University

The Effect of Outside Options on Neighborhood Tipping Points

Peter Blair
,
Clemson University

Abstract

Recent estimates of tipping points in the literature suggest that racial progress in the United States has been slow. According to these estimates, the mean tipping point of US cities increased by 1 percentage point per decade -- from 12% in 1970 to 14% in 1990 (Card, Mas, and Rothstein 2008). I develop a new method for estimating tipping points that depends on both the racial preferences of households and those households’ outside options -- the minority composition of alternative neighborhoods in their city. Previous work has focused on racial preferences, ignoring the substantive role of outside options in tipping. I produce the first estimates of tipping points of individual census tracts within cities. These estimates paint a more optimistic picture of racial progress in the United States: the mean tract-level tipping point has increased from 15% in 1970 to 42% in 2010; and the mean city tipping point has increased from 13% in 1970 to 35% in 2010. I show that the previous estimates of city, or metropolitan statistical area (MSA), tipping points are smaller than my estimates because they are local averages of the tipping point of the marginal census tracts – in other words, the tracts that are close to tipping. Because I estimate tipping points at the census tract level, my city tipping points are averages of the tipping points of both marginal and infra-marginal census tracts. I also find that the concentration of minorities in outside options plays an increasingly important role in explaining differences in tipping points across cities, whereas racial preferences are declining in importance over time.

Geographic Heterogeneity in Housing Market Risk and Portfolio Choice

Tong-yob Nam
,
Office of the Comptroller of the Currency

Abstract

The 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

Philippe Bracke
,
Bank of England
Silvana Tenreyro
,
London School of Economics and Political Science

Abstract

Using 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

John Mondragon
,
Northwestern University
Gene Amromin
,
Federal Reserve Bank of Chicago
Janice Eberly
,
Northwestern University

Abstract

The 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

Adam Guren
,
Boston University
Timothy McQuade
,
Stanford University
Arvind Krishnamurthy
,
Stanford University

Abstract

Abstract 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.
JEL Classifications
  • R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location