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Current Issues in Real Estate Finance

Paper Session

Saturday, Jan. 8, 2022 10:00 AM - 12:00 PM (EST)

Hosted By: American Real Estate and Urban Economics Association & American Finance Association
  • Chair: Johannes Stroebel, New York University

Valuation of Long-Term Property Rights under Political Uncertainty

Zhiguo He
,
University of Chicago
Maggie Hu
,
Chinese University of Hong Kong
Vincent Yao
,
Georgia State University
Zhenping Wang
,
University of Chicago

Abstract

We empirically analyze pricing of political uncertainty in long-term property rights, guided by a theoretical model of housing assets subject to contract extension in the remote future. To identify exposure to political uncertainty, we exploit a unique variation around land lease extension protection beyond 2047 in Hong Kong's housing market due to the historical arrangements under the “One Country, Two Systems"" design. Relative to properties that have been promised an extension protection, those with legally unprotected leases granted by the current Hong Kong government are sold at a substantial discount of around 8%. Similar contracts issued during the colonial era suffer an additional discount of about 8% due to their reneging risk. Our parsimonious model matches well the estimated discounts across long-term lease horizons, and implies that to extend their leases homeowners expect about an additional 22% ground rent after 2047. The discount is higher when people's confidence declines and where residents feel more uncertain of the city's future, but lower when the transaction involves a mainland buyer and a local seller.

Flattening the Curve: Pandemic-Induced Revaluation of Urban Real Estate

Arpit Gupta
,
New York University
Vrinda Mittal
,
Columbia University
Jonas Peeters
,
New York University
Stijn Van Nieuwerburgh
,
Columbia University

Abstract

We show that the COVID-19 pandemic brought house price and rent declines in city centers, and price and rent increases away from the center, thereby flattening the bid-rent curve in most U.S. metropolitan areas. Across MSAs, the flattening of the bid-rent curve is larger when working from home is more prevalent, housing markets are more regulated, and supply is less elastic. Housing markets predict that urban rent growth will exceed suburban rent growth for the foreseeable future.

How Resilient is Mortgage Credit Supply? Evidence from the COVID-19 Pandemic

James Vickery
,
Federal Reserve Bank of Philadelphia
Andreas Fuster
,
EPFL, Swiss Finance Institute, and CEPR
Aurel Hizmo
,
Federal Reserve Board
Lauren Lambie-Hanson
,
Federal Reserve Bank of Philadelphia
Paul Willen
,
Federal Reserve Bank of Boston

Abstract

We study the evolution of US mortgage credit supply during the COVID-19 pandemic. Although the mortgage market experienced a historic boom in 2020, we show there was also a large and sustained increase in intermediation markups that limited the pass-through of low rates to borrowers. Markups typically rise during periods of peak demand, but this historical relationship explains only part of the large increase during the pandemic. We present evidence that pandemic-related labor market frictions and operational bottlenecks contributed to unusually inelastic credit supply, and that technology-based lenders, likely less constrained by these frictions, gained market share. Rising forbearance and default risk did not significantly affect rates on "plain-vanilla" conforming mortgages, but it did lead to higher spreads on mortgages without government guarantees and loans to the riskiest borrowers. Mortgage-backed securities purchases by the Federal Reserve also supported the flow of credit in the conforming segment.

The Economic Burden of Pension Shortfalls: Evidence from House Prices

Michael Schwert
,
University of Pennsylvania
Darren Aiello
,
Brigham Young University
Asaf Bernstein
,
University of Colorado-Boulder
Mahyar Kargar
,
University of Illinois-Urbana-Champaign
Ryan Lewis
,
Brigham Young University

Abstract

U.S. state pensions are underfunded by trillions of dollars, but their economic burden is unclear. In a model of inefficient taxation, real estate fully reflects the cost of pension shortfalls when it is the only form of immobile capital. We study the effect of pension shortfalls on real estate values at state borders, where labor and physical capital could more easily relocate to a state with a smaller shortfall. Using plausibly exogenous variation driven by pension asset returns, we find that one dollar of pension underfunding reduces house prices near state borders by approximately two dollars. Our estimates imply a deadweight loss associated with addressing pension shortfalls that is consistent with prior research in settings with high returns to public spending and costs of taxation.

Discussant(s)
Scott Baker
,
Northwestern University
Andra Ghent
,
University of Utah
Greg Buchak
,
Stanford University
Caitlin Gorback
,
NBER
JEL Classifications
  • R0 - General