The relationship between the demand and supply of home financing and neighborhood characteristics: An empirical study of mortgage redlining

In this study the hypothesis that central cities are redlined was tested with data gathered from three separate central city and matching city-suburban areas. Potentially unmet mortgage demand was estimated from interviews of people who tried unsuccessfully to sell their homes. A hedonic price function revealed that these owners did not overprice their homes. However, they did not attribute their inability to sell to potential buyers' problems with financial institutions. A logit analysis of data provided by home buyers showed that individuals bought in the areas they preferred. We also found that central city and city-suburban home buyers got the type of mortgage they wanted at market terms and home owners in both areas had no difficulty in financing home repairs.This study was supported by the National Science Foundation, Grant No. SES8000 482.     

Why Do Buyers Pay Different Prices for Comparable Products? A Structural Approach on the Housing Market

The Journal of Real Estate Finance and Economics - We focus on the housing market and examine why nonlocal home buyers pay 12% more for houses than local home buyers. We established a database on...     

The Housing Market Effects of Local Home Purchase Restrictions: Evidence from Beijing

Home prices have surged in major Chinese cities, leading to concerns of asset price bubbles and housing affordability. The policy of home purchase restrictions (HPR) has been one of China’s harshest housing market interventions to squeeze out speculative demand and dampen the soaring home prices. Beijing was the first city to implement the HPR. Employing the regression discontinuity design technique, we find that Beijing’s HPR policy triggered a 17–24 % decrease in resale price, a drop in the price-to-rent ratio of about a quarter of its mean value, and a deep (1/2 to 3/4) reduction in the transaction volume of the for-sale market, with no significant change in the rent or the transaction volume of rental units. In submarkets where housing supply was less elastic, the effects of the HPR were larger in price and smaller in quantity, suggesting that wealthy buyers likely benefited more from the HPR. The scope of the analysis does not allow conclusions regarding the persistence or longevity of these effects.     

Understanding in‐house transactions in the real estate brokerage industry

About 20% of residential real estate transactions in North America are in‐house transactions, for which buyers and sellers are represented by the same brokerage. We examine to what extent in‐house transactions are explained by agents' strategic incentives as opposed to matching efficiency. Using home transaction data, we find that agents are more likely to promote internal listings when they are financially rewarded and such effect becomes weaker when consumers are more aware of agents' incentives. We further develop a structural model and find that about one third of in‐house transactions are explained by agents' strategic promotion, causing significant utility loss for home buyers.     

Information, Search, and House Prices: Revisited

Buyers pay different prices for nearly identical homes. One explanation for this is that housing markets are thin, resulting in price bargaining between sellers and buyers. If the relative bargaining power of buyers varies, so will sales prices. One hypothesis is that the relative bargaining strength of buyers coming from outside the local market relative to that of local residents is weak, because distant buyers have high search costs and may know less about the nuances of the local market. Our results, based upon a large number of single-family home transactions from the state of Florida, lend support to this hypothesis. Another related hypothesis is that buyers?? price expectations are anchored to prices they were accustomed to at their previous residence. Hence, if they come from high price markets they will tend to pay more for their new home. This hypothesis is also supported by our results.     

The incidence of Cash for Clunkers: Evidence from the 2009 car scrappage scheme in Germany

This paper investigates the German car scrappage program, focusing on the incidence of the premium. We ask how much of the €2500 ($3500) buyer subsidy is actually captured by the demand side. More precisely, we analyze the program’s impact on different car segments, allowing for heterogeneity in incidence at different points in the vehicle price distribution. Using a unique microtransaction data set, we find that the incidence of the subsidy strongly and significantly varies across price segments. Subsidized buyers of cheap cars paid a little more than comparable buyers who did not receive the subsidy, indicating incidence amounts slightly below 100 %. For more expensive vehicles, subsidized buyers were granted large extra discounts on top of the government premium, translating into incidence amounts considerably greater than 100 %. Taken together, this results in an aggregate incidence amount of up to plus €350 million, suggesting that the positive effect for expensive cars overcompensates the negative effect for small cars.     

Mortgage Prepayment and Default Behavior with Embedded Forward Contract Risks in China’s Housing Market

Most condominiums in China are sold forward on a pre-sale market, where purchasers and developers transact on an underlying property that is not yet completed. During the pre-sale period home buyers face a significant forward contract risk. However, home buyers can borrow mortgages from banks so that they can effectively share the forward contract risk with banks. This explains the phenomenon of irregularly high early-stage default and prepayment rates observed in residential mortgage lending in China, where there are few, if any, financial incentives for mortgage borrowers to exercise either put or call options. Mortgages collateralized by forward housing assets are riskier than are those with underlying assets traded on the spot market. However, currently Chinese mortgage banks charge the same rate to all mortgage borrowers. This inefficiency in risk sharing between mortgage borrowers’ groups in the forward and spot housing markets leads to mispricing in secondary mortgage sales and mortgage-backed security trading.     

Measuring Price Behavior in New Residential Subdivisions

Early buyers of single-family residences in newly developed subdivisions assume a greater level of risk than later buyers in choosing to purchase a home in a new subdivision where the market has not been sufficiently established. This risk stems from such things as uncertainty regarding the maintenance of development standards and other negative externalities inherent in purchasing in the early stages of the development cycle. Because of this, early buyers may require lower prices to compensate them for the additional risk that they assume. This paper explores the evolution of the price of residences in newly developed single-family subdivisions through the phases of development.     

Selling price,financing premiums,and days on the market

Home buyers face the task of trading off selling price and the time required to sell a property. One factor that may affect this decision is the presence of financing premiums. The effects of financing premiums on the time a single-family home remains on the market is examined in this paper. The question is to what extent home sellers are willing to compromise on financing premiums and make concessions to buyers in order to sell their properties more quickly.The study uses a sample of single-family residential homes sold with assumption financing and new conventional financing. The sample covers segments of time when interest rates were relatively low and stable (1975–1976) and when rates were much higher on average and more volatile (1980).The results show that financing premiums were present in selling prices of assumption-financed home sales during the 1975–1976 period and that sellers were able to capture a premium and maintain the same average time on the market as properties with other types of financing. During a period of unfavorable market conditions, such as 1980, the results indicate that home sellers with assumption financing conceded or negotiated away any premium in order to significantly decrease the number of days their properties stayed on the market for sale.     

The value of financing through cross-border asset sales: Shareholder returns and liquidity

We examine a sample of 1458 divestitures of domestic assets by U.S. firms to foreign and domestic buyers over the period 1998–2008. Cross-border asset sales yield higher abnormal returns to the seller than domestic sales. This incremental return is driven by liquidity-seeking sellers engaging in cross-border transactions. Larger seller returns in these international deals are associated with favorable economic conditions in foreign buyers' home markets relative to the U.S. We also find positive abnormal returns for buyers, albeit smaller than seller returns, but no significant difference between buyer returns in cross-border and domestic transactions.     

Policy uncertainty and overseas property purchases: Evidence from China

A political leadership transition occurs in China every five years. This shift in leadership is accompanied by tremendous uncertainty within Chinese society, particularly for the nation's wealthy people. Examining private residential property transaction data in Singapore, this paper reveals that the number of transactions by Chinese mainland buyers increases by half during political transitions that occurred between 1998 and 2013, in comparison to buyers from Malaysia, the US, and Hong Kong.     

Explaining House Price Dynamics: Isolating the Role of Nonfundamentals

This paper examines the role of nonfundamentals‐based sentiment in house price dynamics, including the well‐documented volatility and persistence of house prices during booms and busts. To measure and isolate sentiment's effect, we employ survey‐based indicators that proxy for the sentiment of three major agents in housing markets: home buyers (demand side), home builders (supply side), and lenders (credit suppliers). After orthogonalizing each sentiment measure against a broad set of fundamental variables, we find strong and consistent evidence that the changing sentiment of all three sets of market participants predicts house price appreciation in subsequent quarters, above and beyond the impact of changes in lagged price changes, fundamentals, and market liquidity. More specifically, a one‐standard‐deviation shock to market sentiment is associated with a 32–57 basis point increase in real house price appreciation over the next two quarters. These price effects are large relative to the average real price appreciation of 71 basis points per quarter observed over the full sample period. Moreover, housing market sentiment and its effect on real house prices is highly persistent. The results also reveal that the dynamic relation between sentiment and house prices can create feedback effects that contribute to the persistence typically observed in house price movements during boom and bust cycles.     

Search Costs,Behavioral Biases,and Information Intermediary Effects

In many markets, buyers, sellers, and their agents have differential information about the quality of heterogeneous assets. We study negotiated transaction prices in the commercial real estate market, which is characterized by heterogeneous assets, illiquidity, and highly segmented local markets, all of which increase the importance of asymmetric information in negotiated pricing outcomes. Using 114,588 industrial, multi-family and office sale transactions that occurred during 1997–2011, we document that distant commercial real estate buyers pay, on average, premiums of 4 % to 15 % relative to local buyers, controlling for individual property characteristics as well as time fixed-effects. We also examine the extent to which the sources of these observed premiums are a product of higher search costs/information asymmetry problems associated with distance (search cost channel) or a result of reference-dependence preference/anchoring based on the price levels in the investors’ local market (behavioral biases channel). Our results suggest the observed price premiums are explained by distant investors who face higher search costs and are at an information disadvantage compared to investors located in closer proximity to the property. In contrast, anchoring plays a more muted role in explaining observed premiums. The use of an intermediary (broker) increases, on average, the acquisition prices of buyers and decreases the disposition prices of sellers by 3 % to 8 %. This result is consistent with the incentive real estate agents have to convince sellers to dispose of their properties too quickly and to convince buyers to search less and therefore pay higher prices.     

Consumer‐surplus‐enhancing collusion and trade

That collusion among sellers hurts buyers is a central tenet in economics. We provide an oligopoly model in which collusion can raise consumer surplus. A differentiated‐product duopoly operates in two geographically separated markets. Each market is home to a single firm, but can import, at a cost, from the foreign firm. Under some circumstances, a perfect cartel, relative to duopolistic competition, raises the price of the imported good and lowers the price of the home good. This raises welfare for most consumers and increases aggregate consumer surplus. A similar possibility result applies to autarky. Our analysis applies beyond the spatial setting.     

On the Demand for Portfolio Insurance

While insurers manage underwriting risk with various methods including reinsurance, insurers increasingly manage asset risk with options, futures, and other derivatives. Previous research shows that buyers of portfolio insurance pay considerably for downside protection. We add to this literature by providing the first evidence on the cost of portfolio insurance, the payoff to portfolio insurance, and the relative demand for portfolio insurance across VIX levels. We find that the demand for portfolio insurance is relatively high at low levels of VIX, suggesting purchasers demand more downside protection when this protection is cheap on an absolute basis (but expensive on a relative basis). We also provide the first evidence on the hedging behavior of specific investor classes and show that the demand for portfolio insurance is driven by retail investors (individuals) who buy costly insurance from institutional investors. Results are consistent with other types of paradoxical insurance‐buying behavior.     

Distortions in Real Estate Transactions with Out-of-State Participants

Using the MLS and the land registration data from Indiana, this paper identifies and explains price distortions associated with out-of-state sellers and buyers in the housing market. We find that out-of-state buyers pay 20.4% higher prices than local buyers, and the premium is fully explained by the former purchasing larger homes than the latter. On the other hand, out-of-state sellers receive a 21.2% price discount, among which 9.3% is attributable to differences in transactional characteristics, 3.2% is explained by increased motivation and weak bargaining power of out-of-state sellers, and 1.5% is due to differences in agent characteristics and behaviours. The remaining 7.2% discount varies systematically with the informational disadvantage of out-of-state sellers, and with the market condition. Our results are robust to model misspecification.     

Testing the fire-sale FDI hypothesis for the European financial crisis

Using a panel of corporate transactions in 27 EU countries from 1999 to 2012, we investigate the impact of the financial crisis on the market for corporate assets. In particular, we test the ‘fire-sale FDI’ hypothesis by analyzing the number of cross-border transactions, the price of corporate assets and the impact of credit and macroeconomic conditions. According to the fire-sale FDI hypothesis, countries affected by a crisis attract foreign buyers selling assets at a discount. We find a dampening effect of the crisis on cross-border transactions in all EU countries. Although countries with higher sovereign default risk and lower economic demand attracted more foreign buyers in the crisis, lower domestic credit is associated with less cross-border transactions. Corporate assets in crisis countries are cheaper, particularly if domestic credit is low; however, these findings are not limited to the crisis period. This pattern is strikingly different from the East Asian and Latin American financial crises. Overall, we find little evidence for ‘fire-sale FDI’ suggesting an integrated European market without significant frictions.     

The effect of cost information on buyer–supplier negotiations in different power settings

We investigate the influence of total cost of ownership (TCO) information on buyer–supplier negotiations in different power settings. Based on social exchange theory and recent literature on information processing, we expect that buyers with detailed TCO information and less power than their negotiation partners may try to (re)gain control over their own outcomes by sharing information. The results of our experiment indicate that the performance disadvantage of less powerful buyers is less pronounced when the buyer has detailed TCO information, whereas more powerful buyers do not seem to be able to profit from TCO information. These somewhat counterintuitive findings are explained through detailed analysis of the buyer’s negotiation behavior, which shows that less powerful buyers who have access to TCO data use problem solving techniques more frequently than powerful buyers, who tend to rely on distributive bargaining techniques instead. We conclude that power can motivate a failure to share TCO information, resulting in less effective interfirm negotiation outcomes.     

Focusing on Fannie and Freddie: The Dilemmas of Reforming Housing Finance

Fannie Mae and Freddie Mac are unique and controversial participants in the housing finance system of the United States. Because of these enterprises' federal government charters, the financial markets believe that the government would not allow Fannie and Freddie to fail to honor their debt obligations, and they are thereby able to borrow more cheaply in credit markets; in turn, they lower interest rates for residential mortgages. If the financial markets are right, however, Freddie and Fannie also create a contingent liability for the government. Though there are positive externalities from home ownership, the Fannie/Freddie route is far too broad and unfocused to address those externalities effectively. Privatization, accompanied by targeted federal assistance for potential first-time low- and moderate-income home buyers, would be a superior policy direction.     

Durable goods and conformity

A consumer's demand for a durable good is governed not only by his individual preferences but also by preferences of other market participants. This interdependence of preferences arises from the inevitable resale of durable goods. If most people prefer goods with certain features, original buyers conform and choose goods with these features even if they do not like them. Using a matching model, we show there is always conformity in equilibrium. The incentive to conform is strongest for long‐lived durables and for people who trade frequently. If average preferences are sufficiently strong, there is always too little conformity in equilibrium.