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Residential Investment

Paper Session

Friday, Jan. 4, 2019 8:00 AM - 10:00 AM

Hilton Atlanta, 217
Hosted By: American Real Estate and Urban Economics Association
  • Chair: Sumit Agarwal, National University of Singapore

Quality Uncertainty in Housing Markets

Jordan Martel
,
University of Colorado Boulder

Abstract

In this paper, we quantify the effect of buyers' uncertainty about a home's quality on its pricing and liquidity. We first develop a parsimonious model of home sale in which buyers learn about the home's quality from a walkthrough and from the home's days-on-market. Quality uncertainty distorts prices and delays trade. As time passes, buyers become pessimistic and sale prices fall. Using transaction-level data from Denver, Charlotte, and Detroit, we structurally estimate counterfactual days-on-market and sale prices for six hundred thousand homes that sold between 2005 and 2015. The costs of quality uncertainty are borne by sellers of high quality homes through mispricing, and by sellers of low quality homes through illiquidity: relative to a market in which home quality were known to buyers, high quality homes take 11 days longer to sell, and sell for 8.0% less, while low quality homes take 47 days longer to sell, and sell for 4.5% more.

Housing Wealth, Health and Deaths of Despair

Ariadna Jou
,
University of California-Los Angeles
Nuria Mas
,
IESE Business School
Carles Vergara-Alert
,
IESE Business School

Abstract

We use household-level data to study the causal effects of exogenous changes in housing
wealth on health and the drug crisis in the US attributed to "deaths of despair". We find
that a one standard deviation positive shock in housing wealth increases the probability of
an improvement in self-reported health (mental health) by 1.0 (1.10) percentage points and
decreases the change in drug-related mortality rate by 4.3 percent. We also find that the impact of housing wealth on health varies across socioeconomic groups and is more pronounced in MSAs in which housing supply is more inelastic, which explains the differential effect of economic cycles across geographical areas.

Residential Investment and Recession Predictability

Andre K. Anundsen
,
Norges Bank
Knut Are Aastveit
,
Norges Bank
Eyo Herstad
,
University of Chicago

Abstract

We assess the importance of residential investment in predicting economic recessions for an unbalanced panel of 12 OECD countries over the period 1960Q1-2014Q4. Our approach is to estimate various probit models with different leading indicators and evaluate their relative prediction accuracy using the area under the receiver operating characteristic curve as our metric of forecasting performance. We document that residential investment contains information useful in predicting recessions both in-sample and out-of-sample. This result is robust to adding typical leading indicators, such as the term spread, stock prices, consumer confidence surveys and oil prices. It is shown that residential investment is particularly useful in predicting recessions for countries with high home-ownership rates. Finally, in a separate exercise for the US, we show that the predictive ability of residential investment is - in a broad sense - robust to employing real-time data.

The Effect of Tax Reform on Tax Liabilities of Owners and Renters

Gary McGill
,
University of Florida
David Ling
,
University of Florida
Patric H. Hendershott
,
Ohio State University

Abstract

The Tax Cuts and Jobs Act of 2017 roughly doubles the standard deduction, eliminates personal exemptions and limits/eliminates many deductions. These include deductions for local property taxes and state and local income taxes and the amount of mortgage interest that can be deducted on new purchases/refis. The higher standard deduction will substantially increase its use. The effects on households will vary by household type, number of personal exemptions, tenure, income and location of residence (level of house prices and state and local tax rates) and a number of other variables. We illustrate how the percentage change in a household’s taxes varies with these variables. We find that only households with AGIs over a million dollars living in high house price areas with high state taxes will pay higher taxes.
Discussant(s)
Wenlan Qian
,
National University of Singapore
Xin Zou
,
Hong Kong Baptist University
Jian Zhang
,
Hong Kong Baptist University
Changcheng Song
,
National University of Singapore
JEL Classifications
  • C7 - Game Theory and Bargaining Theory
  • I1 - Health