Investors, Purchasers, and House Prices
Sunday, Jan. 5, 2020 8:00 AM - 10:00 AM (PDT)
- Chair: Xudong An, Federal Reserve Bank of Philadelphia
Price-setting and Incentives in the Housing Market
AbstractIn auctions, a seller may strategically set a low ask price in an attempt to trigger more interest. More interest would increase the probability of multiple high bids and a bidding war. Does such a strategy actually work? We study a combination of data sets on repeat-sales, repeat-sellers, repeat-bids, and repeat-realtors sourced from Norwegian housing transactions, realtors' bid-logs, and official registers of ownership. More than fifty percent of the sellers offer an ask price that is below the estimated market value. Our results suggest that this is sub-optimal. A lower ask price leads to more bids, which in itself contributes to a higher sell price. However, a lower ask price price also anchors the opening bid in the auction, which has a negative impact on the sell price. We find that the anchoring effect dominates the increased-interest effect trigger by a lower ask price. It does, however, appear to imply a higher sell-ask spread -- a sales pitch for the real estate agent. We find that high-performing realtors recommend different ask price strategies than low-performing realtors. High-performing realtors tend not to be associated with transactions in which strategic ask prices have been used. Low-performing realtors, however, tend to be associated with such transactions. Moreover, a time-series regression among low-performing realtors shows that when a realtor in one year tends to use strategic ask prices, this realtor sees more business the next year. For high-performing realtors, there is no such association. Finally, we find that sellers who previously failed on the strategy of a low ask price learn that this is sub-optimal, and in consequence are less likely to offer a discount the next time they sell.
Financing Risk and Information Bias in Housing Markets
AbstractIn Los Angeles, the fraction of all-cash home purchases quintupled from 3.6% in 2005 to 18.8% in 2012, and this fraction increased more substantially among some types of buyers, such as Chinese buyers and out-of-town buyers. Given that mortgage transactions entail financing risk which is absent in all-cash transactions, this rapid growth in all-cash transactions provides a natural opportunity to quantify two sources of housing market frictions: financing risk, that is, financing frictions that could potentially cause delays and risks in getting a mortgage offer approved; and information bias caused by asymmetric information among different types of buyers. Controlling for a rich set of house and buyer characteristics, we find that an all-cash purchase is associated with about 6% discount in the sales price. The estimate is robust to various house- and buyer- fixed effects and an instrumental variable strategy. We then explore heterogeneity in cash discounts among buyers with different information sets and across different stages of housing market cycles. We find that the estimated cash discount is larger among more informed buyers, with accumulated experience more important than proximity of experience. In addition, cash discount is larger in a housing bust, hence attracting more cash buyers in a bust, which in turn helps distressed local market recover faster. Lastly, aggregating our results suggests that both financing risk and information bias can also amplify the impact of economic shocks on housing prices.
Investors and Housing Affordability
AbstractThis paper studies the impact of housing investors on the dynamics of housing affordability, after the Global Financial Crisis. Using an instrumental variable approach, we find that the investors' purchases in the U.S. MSAs, increase the price-to-income ratio, especially in the bottom price-tier of the market, and in areas with large supply restrictions. However, these effects are short-lived. Investors cause a significant supply response, as they increase granting of new building permits. In the medium-term, investors' purchases lead to reductions in prices and improved affordability. These findings should be considered when designing policy regulations.
- R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location
- G1 - General Financial Markets