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Abstract: Technological innovation continues to disrupt virtually every sector of the U.S. economy. This paper explores one such innovation, namely iBuyers (i.e., firms who use PropTech to provide online quotes and make quick cash offers on homes), and studies their impact on various housing market dynamics. More specifically, we find the presence of iBuyers increases home prices in local markets by up to 2.8%. We further hypothesize that strategic behavior on the part of home sellers, and particularly increased “fishing” for high offers after the entrance of iBuyers into a market, helps explain this phenomenon. This explanation is strongly supported by an observable increase in both time on market (TOM) and listing prices following the entry of iBuyers. Lastly, we find iBuyers compete with and crowd out potential local homebuyers, forcing them into neighboring markets, and thereby causing home prices in these adjacent ZIP codes to increase as well. PubDate: 2023-05-26
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Abstract: This study examines the relationship between firm leverage and stock price crash risk, where extant literature shows mixed findings on the impact of leverage on stock price crashes. Utilizing the Chinese real estate industry setting with high debt financing, we show that leverage is significantly positively associated with stock price crash risk. We further examine how the relationship between leverage and stock price crash risk is attributed to the unique Chinese institutional and economic environment. We show that the effect of leverage on stock price crash risk is concentrated in regions of low social trust, low marketization, and low economic growth. We next consider China’s new guidance of the “three red lines” that governs firms’ debt financing policies, and we find that, among the three-red-line debt measures, the liability-to-asset ratio is the most significant determinant of crash risk. We also examine the implementation of the guidance in August 2020 with a difference-in-difference research design, and we show that the new guidance has significantly reduced stock price crash risk for high-leverage firms. Overall, our results show consistent evidence of stock price crash risk increases for Chinese real estate firms that have shown overreliance on debt financing. Our study highlights the vital role of firm leverage on stock price crash risk that pertains specifically to highly-levered firms. PubDate: 2023-05-23
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Abstract: This paper examines whether and how individual risk-taking behavior affects real estate financing through shadow banks. Using the loan data from an online platform in China, we show that riskier households tend to employ online loans to meet the increasing down-payment in their home purchase. Individual investors are likely to fund riskier real estate loans with higher expected returns. Real estate loans experience higher ex-post default rates than other types of loans. The effect is more pronounced during the period of credit constraints. PubDate: 2023-05-06
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Abstract: This study examines mortgage market implications of the opioid public health crisis in the United States. Employing data on over 4 million mortgage loan application records, we find lenders are less likely to approve loans from areas with relatively higher levels of opioid abuse significantly impeding borrowers’ access to financial markets. Consistent with risk channeling, originated mortgage loans are more likely to have lower loan-to-income ratios in areas with higher rates of opioid abuse. Heterogeneity among lender firms also affects the extent to which lenders incorporate concerns about risks induced by the opioid crisis into loan underwriting, with traditional lenders located in the county where the purchased residential property is located being most likely to base loan approval decisions on the perceived severity of the local opioid epidemic. The U.S. Drug Enforcement Administration’s tightening controls of hydrocodone products serves as a quasi-natural experiment and supports a causal interpretation suggesting opioid abuse is an additional risk factor that is likely to affect mortgage lending decisions on the extensive margin. PubDate: 2023-05-05
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Abstract: This study analyzes the impact of various proxies for an acquirer’s opportunity set on its post-acquisition abnormal performance and on its likelihood of making an acquisition. Our initial empirical analysis consists of a sample of acquisitions by Real Estate Investment Trusts (REITs) of public and private targets over the period 1994 to 2015. Using REIT acquisitions allows us to utilize an alternative measure, the cap rate, of the firm’s opportunity set, in addition to those available for regular corporations: Tobin’s Q and short momentum. Specifically, we use the regional cap rate that corresponds to the target’s headquarters. Controlling for multiple factors that influence post-acquisition performance, we find that buy-and-hold abnormal returns to REIT acquirers are highly positively related to the cap rate at the time of the acquisition; however, Tobin’s Q has no significant impact. Short momentum has a negative impact on performance. We also show that higher cap rates, Tobin’s Q and short momentum all lead to more frequent acquisitions. In addition, we analyze a sample of 25,851 property acquisitions and find that the cap rate and Tobin’s Q are positively related to the number of property acquisitions a REIT makes. The results of this empirical analysis support the notion that positive investment opportunities in real markets (organic growth) are associated with positive acquisition opportunities (inorganic growth). We perform several robustness tests to corroborate our results. PubDate: 2023-05-01
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Abstract: Renewable energy production is one of the most important policy instruments to fight climate change. However, despite global benefits, renewable energy production entails some local challenges, such as requiring more space per unit production capacity. In this paper, we study the external effects of large-scale conventional and renewable electric power generation facilities on local house prices. We combine information of all coal, gas, and biomass plants, as well as all wind turbines in the Netherlands, with 1.5 million housing transactions over a period of 30 years. Using a difference-in-difference as well as a repeated sales model, we study the effects of facility openings and closings. Our results show negative external price effects for gas plants and wind turbines, but positive effects for biomass plants, conditionally upon ex-ante lower priced locations. The external effects of power generating facilities on local housing markets are important to consider, especially with the current focus of public policies on the expansion of renewable energy generation. Our paper is one of the first to present a large-scale study, using detailed information, and comparing several different energy sources in one framework. PubDate: 2023-05-01
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Abstract: Reverse mortgages are designed to offer additional sources of financing incomes to senior homeowners. In the United States, home equity conversion mortgages (HECMs) are nonrecourse reverse mortgage loans insured by the Federal Housing Administration (FHA). Based on a fairly recent stream of the reverse mortgage literature, the relatively high loan-to-value ratio has jeopardized the financial soundness of such contracts. In the wake of the 2008 financial crisis, rising property taxes and homeowner insurance defaults impaired HECM solvency; hence, policy changes were implemented to help prevent borrower default. In this paper, we propose a pricing solution which, as we demonstrate in the paper, effectively improves program solvency by fairly matching the benefits and liabilities of HECM participants. The methodology allows for customization of fair mortgage loan payments and premiums and improves program accessibility based on borrowers’ individual credit and default risk. Our proposed pricing solution and the corresponding newly designed rating system provide HECM policymakers with a better payment arrangement and offer important policy implications for the current HECM program. Rather than borrower property taxes and insurance delinquency, we demonstrate that the mispricing of HECM mortgage insurance premiums and the corresponding loan payments could be the primary reasons for program insolvency. PubDate: 2023-05-01
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Abstract: We test the ability of the Decoy Effect to enhance debt collection efforts and find that by disclosing the Annual Percentage Rate (APR) in settlement offers, participants are less influenced by the decoy and more apt to select the repayment option that is in their best interest. At the same time, by reporting the APR, borrowers are more willing to make repayments on the modified loan, resulting in a net gain to debt collection efforts. Because disclosing the APR is Consumer Financial Protection Bureau (CFPB) compliant, this simple disclosure has the ability to increase debt collection returns while helping borrowers make better decisions when selecting debt modification repayment plans. Our results suggest an applicability to all types of defaulted debt including mortgages, sub-prime auto loans, credit cards, student loans, and payday loans. PubDate: 2023-05-01
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Abstract: This paper examines the non-linear integration between the real estate and stock market for a series of developed markets namely UK, Germany, Australia, Hong-Kong, Japan, Singapore and the US. The period of analysis covers different market phases for these countries. We examine the volatility dynamics of the real estate and stock market in the UK and Germany within a novel FIGARCH-BEKK model. Our results reveal evidence of a common long-term fractional integration between real estate and stock market for these two countries. Moreover, when there is a lower common order of fractional integration, there might also be a significant bilateral or unilateral volatility spillover effect between real estate and stock market. Robustness tests confirm the consistency of the FIGARCH-BEKK model even during the global financial crisis. Additional tests capture the existence of volatility spillovers and fractional integration in the rest of countries (Australia, Hong-Kong, Japan, Singapore and the US) under examination. Our findings entail significant implications for investors and policy makers. PubDate: 2023-05-01
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Abstract: Many papers use numerical information to estimate the price of a property even if improvements in information technology enable sellers to convey more information, in an increasing variety of formats. In our model, each seller sends a message and buyers search for a good match in terms of hidden differentiators. Since the meaning of a message is determined endogenously, multiple steady state equilibria exist. A maximal equilibrium displays assortative matching and its messaging strategies maximize the flow of surplus value. We show that it exists if the matching rate is high enough. This analysis reveals differences associated with newer media. For example, video can display information in such detail that a buyer may not need to inspect the house. The real time interactivity of social media also makes better messaging possible, if not necessarily consistent with an equilibrium. The goal of many social media messages is to “go viral” and that goal requires the participation of influencers, whose motives need to be considered more carefully. We offer a number of empirical predictions, conjectures and interesting special cases. We show that if the set of possible messages is a continuum then perfect messages are possible and selling prices would adapt in a way that minimizes time on market. In a maximal equilibrium, the messaging strategy used by a given type of seller need not vary across segments if the differences between segments are observable. Since so many people think that many property descriptions are colorful exaggerations, our equilibrium model provides a context for discussing whether a message misleads. PubDate: 2023-05-01
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Abstract: Environmentally-sustainable investment can impact firm financial performance through multiple channels. We concentrate on disentangling the related cash flow and valuation impacts. By using an instrumental variable approach, we find that U.S. REITs with a more environmentally-sustainable portfolio attract premiums to their market valuation beyond operating benefits, carry lower systematic risk, and are subject to less uninformed trading (for office and retail portfolios). Such firms also experience both higher asset-level rental revenues and net operating income, and lower interest costs. Importantly, the equity market premium exceeds the property market premium, which is partially explained by reputational effects. Results also confirm valuation findings in office and retail portfolios. PubDate: 2023-05-01
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Abstract: While supply elasticity can explain why housing prices appreciate by different amounts across cities, it may play a lesser role in smaller geographic units, such as neighbourhoods within a city. This is because of location substitution: a city cannot be easily substituted by another city, but neighbourhoods of the same city can be close substitutes. This paper revisits the question of whether supply elasticity can differentiate housing price appreciation rates within a city by carefully accounting for substitution effects at the neighbourhood level. From a Hong Kong housing boom (2003—2018), we have found that the impact of supply elasticity on another neighbourhood on average is about one-tenth of the impact on its own neighbourhood. It rejects the notion of perfect substitution, under which this magnitude difference should not have been identified. The contribution of this paper is threefold: 1) It clarifies the theoretical relationship between supply elasticity and substitution in shaping housing price movements. 2) It proposes two novel ways to account for neighbourhoods’ substitution using the spatial spillover of land availability and price co-movement. 3) It delivers a clear answer that supply elasticity can shape the housing price movements within a city. PubDate: 2023-04-28
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Abstract: Mortgage risk assessment is based on hazard models using data on “seasoned” mortgages, endorsed in previous years. These models assume that the lender’s pricing decision has no effect on the parameters of the hazard function. This paper argues that, when indicators of creditworthiness that can be influenced by applicants have a significant effect on credit cost, applicants behave strategically to influence the information disclosed to lenders. This gives rise to a Lucas Critique in which models generally perform well but occasionally fail because applicants are able and motivated to behave strategically. PubDate: 2023-04-24
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Abstract: Surveys regularly ask home-owners to guess what their property might be worth in the current housing market. We develop suitable statistical techniques to construct hedonic and repeat-sales style house price indices from these owner-estimated values (OEVs). The resulting series are then linked to a large set of quality-adjusted residential property price indices estimated from transaction data allowing us to perform a variety of convergent validity tests. Based on results for 20 countries, several decades and different OEV elicitation techniques, we conclude that the “wisdom of the home-owner crowd” is sufficient to study objective house price dynamics. Yet, surveys fail to accurately measure house price levels. PubDate: 2023-04-22
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Abstract: The trade-off between the potential benefits and costs of using corporate real estate (CorRE) in the production process creates an optimal level of CorRE that varies over time and across firms. We document the importance of conditioning on a firm’s optimal CorRE usage when analyzing the relation between CorRE and firm valuations. Controlling for year and firm fixed effects and using rolling-window regressions, we estimate differences in firms’ actual CorRE usage from predicted levels by industry and examine how the difference affects firm value. We find a nonlinear relation between firm value and the deviation of CorRE usage from predicted levels: investors tend to punish the valuations of companies when CorRE usage deviates from predicted levels, especially for the companies that use more CorRE than predicted. This result is robust to instrumental variable regressions. We uncover several channels through which deviations in the use of CorRE can affect firm value: firm profitability, the cost of debt, sales growth, and investment in non-real estate assets. PubDate: 2023-04-03
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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, decreases the change in drug-related mortality rate by 4.3%, and has no effect on alcohol- or suicide-related deaths. The opposite effect also holds, such that a negative shock on wealth increases the probability of a decline in health. 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. Our results suggest that housing-related policies could have important implications for general health outcomes as well as for the opioid crisis. PubDate: 2023-04-01 DOI: 10.1007/s11146-020-09801-5
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Abstract: The loss on a distressed mortgage depends not only on economic and financial conditions but also on the value of the property and how it is transferred to a new owner. Using data from Fannie Mae, we investigate the differences in loss experience across alternative mechanisms for disposing of property (real estate owned or REO, deed in lieu, short sales, and foreclosure sales) from 2003 through 2017. In general, losses are lowest for short sales and foreclosure sales. But these lower losses depend on the overall distress level of the market. The more distressed the market is, the smaller the relative gains associated with these alternative approaches, as compared to traditional REO sales. In contrast, in markets with rapidly increasing distress short sales have lower losses relative to traditional REO sales. We use a variety of matching techniques to address selection issues associated with REO properties and find that the lower loss severities associated with non-REO sales remain. PubDate: 2023-04-01 DOI: 10.1007/s11146-020-09785-2
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Abstract: This paper uses biographical information of executives and directors of REITs in the US to show whether, and through what channels, top executives of REITs are influenced by their social peers when determining capital structure risk control strategies, especially in critical periods. Our focus is on the period of the 2007–2009 Financial Crisis. We find that peer influence through past employment and sharing activities significantly facilitate peer learning in making decisions on debt maturity extension, but does not affect leverage reduction. We find that being educated from the same school carries some effects on leverage reduction, possibly via its influence on managers’ personal traits. However, concurrent employment does not play a role in determining either of the strategies. We further verify the existence of influence of social network in decision making of REITs in 2015 in preparation for a boom at the beginning of the up-market. Hence, our study highlights the strength of peer connections in clarifying possible sources of herding in REITs decisions. PubDate: 2023-04-01 DOI: 10.1007/s11146-021-09833-5
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Abstract: To the extent that a property portfolio is dependent on a small number of tenants for a large proportion of rental revenue, the portfolio has a concentrated tenant base. This article investigates the impact of tenant concentration on property portfolio performance, risk, and the cost of debt. Utilizing the disclosure of major tenants by 152 Equity Real Estate Investment Trusts (REITs) from 2000 to 2017, I document a positive relation between tenant concentration and profitability. REITs with greater tenant concentration experience higher profit margins and lower expense ratios, suggesting the positive relation between tenant concentration and profitability is driven by increased operational efficiency. Although these REITs are more efficient, tenant concentration is often stated as a risk in public disclosures. Consistent with this view, I find that REITs with greater tenant concentration have greater idiosyncratic risk. Further, banks appear to price this risk into their rate setting process and penalize REITs with greater tenant concentration. Accounting for the quality of the tenant base, the positive effects of tenant concentration are prevalent in REITs with high quality tenants and the negative effects of tenant concentration are prevalent REITs with low quality tenants. PubDate: 2023-04-01 DOI: 10.1007/s11146-021-09829-1
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Abstract: Location spillovers are a common theme in real estate and urban economics research, but this is the first test on the relationship between hospital service quality and the demand for proximate medical office space. We hypothesize that hospitals with reputations for high quality service represent an opportunity for physicians, and other service providers, to benefit from reputation spillovers. Further, the reputation benefit is capitalized into the practices’ willingness to pay for proximate office locations, thereby driving up the rental rates for nearby space. We find that distance from, and overall quality ranking of the hospital, both independent and in concert, are significantly linked to the base rents. The degradation in rent with distance is significantly greater when the hospital is ranked high in overall service quality, supporting the notion that a rent premium is linked to the high-quality hospital rather than simply an artifact of the neighborhood. PubDate: 2023-04-01 DOI: 10.1007/s11146-021-09855-z
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