Home for the Holidays
The Inefficiency of Refinancing: Why Prepayment Penalties Are Good for Risky Borrowers
Christopher Mayer, Tomasz Piskorski & Alexei Tchistyi
NBER Working Paper, December 2010
Abstract:
This paper explores the practice of mortgage refinancing in a dynamic competitive lending model with risky borrowers and costly default. We show that prepayment penalties improve welfare by ensuring longer-term lending contracts, which prevents the mortgage pools from becoming disproportionately composed of the riskiest borrowers over time. Mortgages with prepayment penalties allow lenders to lower mortgage rates and extend credit to the least creditworthy, with the largest benefits going to the riskiest borrowers, who have the most incentive to refinance in response to positive credit shocks. Empirical evidence from more than 21,000 non-agency securitized fixed rate mortgages is consistent with the key predictions of our model. Our results suggest that regulations banning refinancing penalties might have the unintended consequence of restricting access to credit and raising rates for the least creditworthy borrowers.
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Zhou Yu & Dowell Myers
Urban Studies, November 2010, Pages 2615-2640
Abstract:
Despite ominous signs of housing market stress in the US, the homeownership rate reached an all-time high in 2006. The conventional definition of homeownership, which is based on the share of households and ignores the effects of variable household formation, confounds the measurement of 'success' in achieving homeownership. It is found that, from 1990 to 2006, declining household formation led to an elevated homeownership rate in the US and that this effect varies substantially between racial/ethnic groups. Asians, who achieve high homeownership rates, have the lowest propensity to form independent households, in sharp contrast to African Americans. Asians do not have better access per capita to owner-occupied housing than do Blacks. The conventional measure of homeownership is an incomplete measure of homeownership opportunity because it fails to account for variable household formation. The changing population mix in the US includes groups with different propensities for household formation, thus confusing future assessments of homeownership and the housing market.
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Momentum and House Price Growth in the United States: Anatomy of a Bubble
Rose Lai & Robert Van Order
Real Estate Economics, Winter 2010, Pages 753-773
Abstract:
This article analyzes the bubble in property values across cities in the United States from 1999 through 2005. We find evidence of momentum in house price growth (relative to growth in rents) away from the underlying fundamentals throughout the 1980-2005 period; however, momentum increased after 1999. We find that the bubble happened mostly after 2003; it was for a relatively short period and was characterized by a series of positive, seemingly random, shocks that were associated with the surge in the subprime market and the decline in short-term interest rates. Before that price changes were reasonably well explained by the fundamentals, particularly the decline in long-term interest rates in the early part of the bubble period. We do not find evidence of a tendency for prices relative to rents to revert to a long-run trend.
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CRA's "Blind Spots": Community Reinvestment and Concentrated Subprime Lending in Detroit
Philip Ashton
Journal of Urban Affairs, December 2010, Pages 579-608
Abstract:
As the mortgage crisis took shape by 2007, the Community Reinvestment Act of 1977 emerged at the center of a debate over whether community reinvestment regulations were perverse incentives promoting high-risk lending, or whether those regulations had become outmoded in the face of concentrated subprime lending. This paper weighs those arguments by examining the market behavior of lenders subjected to Community Reinvestment Act (CRA) as the subprime lending boom took shape after 2004. Using Detroit as an illustrative case, it empirically examines the market structure of high-cost lending, as well as the role played by CRA-covered lenders in the critical market segments most prone to concentrated subprime lending. The results suggest that several "blind spots" in CRA regulations weakened the Act's ability to counter the firm- and neighborhood-level segmentation that characterized the growth of concentrated subprime lending in Detroit during the peak years of the housing boom.
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Why Do Vacant Houses Sell for Less: Holding Costs, Bargaining Power or Stigma?
Geoffrey Turnbull & Velma Zahirovic-Herbert
Real Estate Economics, forthcoming
Abstract:
This article introduces Nash bargaining into a search model to identify various channels through which vacancy affects selling price and liquidity in the resale market for houses. The model shows the various vacancy effects in the form of greater seller holding cost, lower seller bargaining power and unobserved negative attributes or stigma. We use a 20-year data series on house transactions to test for these effects in a simultaneous model of price and liquidity, using the long data series to allow for variation across market phases. The robust vacancy effects on price and liquidity across all market phases primarily reflect greater seller holding cost and diminished bargaining power. Repeatedly, vacant houses also exhibit significant stigma effects in the rising market but not in stable or declining market phases. At the same time, vacant houses enjoy stronger shopping externality effects from surrounding houses for sale than do their occupied counterparts.
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Valuing improved hurricane forecasts
Jeffrey Lazo & Donald Waldman
Economics Letters, forthcoming
Abstract:
The value to households of improved hurricane forecasts is estimated from a pilot survey using discrete choice econometric methods. Each household is willing to pay approximately $13 for improvements in forecast attributes such as landfall time and position, wind speed, and storm surge.
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Productivity in cities: Self-selection and sorting
Anthony Venables
Journal of Economic Geography, forthcoming
Abstract:
Productivity is high in cities partly because the urban environment acts as a self-selection mechanism. If workers have imperfect information about the quality of workers with whom they match and matches take place within cities, then high-ability workers will choose to live and work in expensive cities. This self-selection improves the quality of matches in such cities. The mechanism may be reinforced by the development of informational networks in cities with a large proportion of high-ability workers. As a consequence productivity in these cities is high for workers of all ability types.
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Tax Limits and Housing Markets: Some Evidence at the State Level
William Hoyt, Paul Coomes & Amelia Biehl
Real Estate Economics, forthcoming
Abstract:
Property tax limitations, as well as other tax and expenditure restrictions on state and local governments in the United States, date back to the late 19th century. A surge in property tax limitation legislation occurred in the late 1970s and early 1980s, and its effects on government revenue, school financing and educational quality have been studied extensively. However, there is surprisingly little literature on how property tax limits affect housing markets. For the first time, we examine the impacts of property tax limitations on housing growth, in addition to their impacts on housing prices. Using state-level data over 23 years, we find that property tax limits increase housing prices (indexes) by approximately 2%. Property tax limits appear to have little impact on the growth in the housing stock, but education spending limits reduce the number of building permits by over 6%. Our indirect evidence suggests that the number of housing units may grow when property tax limits are accompanied by increases in other own-source revenues to state government.
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The effect of capital gains taxation on home sales: Evidence from the taxpayer relief act of 1997
Hui Shan
Journal of Public Economics, February 2011, Pages 177-188
Abstract:
The Taxpayer Relief Act of 1997 (TRA97) significantly changed the tax treatment of housing capital gains in the United States. Before 1997, homeowners were subject to capital gains taxation when they sold their houses unless they purchased replacement homes of equal or greater value. Since 1997, homeowners can exclude capital gains of $500,000 (or $250,000 for single filers) when they sell their houses. Such dramatic changes provide a good opportunity to study the lock-in effect of capital gains taxation on home sales. Using 1982-2008 transaction data on single-family houses in 16 affluent towns within the Boston metropolitan area, I find that TRA97 reversed the lock-in effect of capital gains taxes on houses with low and moderate capital gains. Specifically, the semiannual sales rate of houses with positive gains up to $500,000 increased by 0.40-0.62 percentage points after TRA97, representing a 19-24 percent increase from the pre-TRA97 baseline sales rate. In contrast, I do not find TRA97 to have asignificant effect on houses with gains above $500,000. Moreover, the short-term effect of TRA97 is much larger than the long-term effect, suggesting that many previously locked-in homeowners took advantage of the exclusions immediately after TRA97. In addition, I exploit the 2001 and 2003 legislative changes in the capital gains tax rate to estimate the tax elasticity of home sales during the post-TRA97 period. The estimation results suggest that a $10,000 increase in capital gains taxes reduces the semiannual home sales rate by about 0.1-0.2 percentage points, or 6-13 percent from the post-TRA97 average sales rate.
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The value of disappearing beaches: A hedonic pricing model with endogenous beach width
Sathya Gopalakrishnan, Martin Smith, Jordan Slott & Brad Murray
Journal of Environmental Economics and Management, forthcoming
Abstract:
Beach nourishment is a policy used to rebuild eroding beaches with sand dredged from other locations. Previous studies indicate that beach width positively affects coastal property values, but these studies ignore the dynamic features of beaches and the feedback that nourishment has on shoreline retreat. We correct for the resulting attenuation and endogeneity bias in a hedonic property value model by instrumenting for beach width using spatially varying coastal geological features. We find that the beach width coefficient is nearly five times larger than the OLS estimate, suggesting that beach width is a much larger portion of property value than previously thought. We use the empirical results to parameterize a dynamic optimization model of beach nourishment decisions and show that the predicted interval between nourishment projects is closer to what we observe in the data when we use the estimate from the instrumental variables model rather than OLS. As coastal communities adapt to climate change, we find that the long-term net value of coastal residential property can fall by as much as 52% when erosion and cost of nourishment sand triple.
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Subprime Lending and Real Estate Prices
Andrey Pavlov & Susan Wachter
Real Estate Economics, forthcoming
Abstract:
This article establishes a theoretical and empirical link between the use of aggressive mortgage lending instruments, such as interest-only, negative-amortization or subprime mortgages, and the underlying house prices. Such instruments, which come into existence through innovation or financial deregulation, allow more borrowing than otherwise would occur in previously affordability-constrained markets. Within the context of a model with an endogenous rent-buy decision, we demonstrate that the supply of aggressive lending instruments temporarily increases the asset prices in the underlying market because agents find it more attractive to own or because their borrowing constraint is relaxed, or both. This result implies that the availability of aggressive mortgage lending instruments magnifies the real estate cycle and the effects of fundamental demand shocks. We empirically confirm the predictions of the model using recent subprime origination experience. In particular, we find that regions that receive a high concentration of aggressive lending instruments experience larger price increases and subsequent declines than areas with low concentration of such instruments. This result holds in the presence of various controls and instrumental variables.
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Association of Walkability With Obesity in Baltimore City, Maryland
Sarah Stark Casagrande et al.
American Journal of Public Health, forthcoming
Objectives: To investigate the association between walkability and obesity, we studied adults residing in Baltimore City, Maryland, in neighborhoods of varying racial and socioeconomic composition.
Methods: We conducted a cross-sectional study of 3493 participants from the study Healthy Aging in Neighborhoods of Diversity across the Life Span. We used the Pedestrian Environment Data Scan to measure neighborhood walkability in 34 neighborhoods of diverse racial and socioeconomic composition in which the study participants lived. Confirmatory factor analysis was used to determine walkability scores. Multilevel modeling was used to determine prevalence ratios for the association between walkability and obesity.
Results: Among individuals living in predominately White and high-socioeconomic status (SES) neighborhoods, residing in highly walkable neighborhoods was associated with a lower prevalence of obesity when compared with individuals living in poorly walkable neighborhoods, after adjusting for individual-level demographic variables (prevalence ratio-[PR]=0.58; P=<.001 vs PR=0.80; P=.004). Prevalence ratios were similar after controlling for the perception of crime, physical activity, and main mode of transportation. The association between walkability and obesity for individuals living in low-SES neighborhoods was not significant after accounting for main mode of transportation (PR=0.85; P=.060).
Conclusions: Future research is needed to determine how differences in associations by neighborhood characteristics may contribute to racial disparities in obesity.