Foreclosure,REO, and Market Sales in Residential Real Estate

Assessment of lender and third-party bidder acquired properties at foreclosure auction is provided. Properties acquired at foreclosure auction by third-party bidders transact at a discount to lender dispositions of real estate owned (REO) properties. The discount reflects a reduction in costs associated with lender owned (REO) dispositions and uncertainty faced by third-party bidders. Moreover, there is a ranking in transaction prices among initial purchases by third-party bidders at foreclosure auction, REO sales, non-distressed property sales and the subsequent sales of third-party bidder acquired properties. Third-party bidder auction prices are below REO sale prices, which are below non-distressed property sale prices, which are below the subsequent sale prices of third-party bidder acquired properties. The price spacing by cohort is logical, intuitive and economically justified in a market with rational participants. Implications are also apparent for the measurement of price changes, net sale proceeds and returns to residential real estate.     

Elective Mortgage Prepayment: Termination and Curtailment

Mortgage-prepayment risk underlies the structuring of mortgage-backed derivative securities, such as tranched real estate mortgage investment conduits. This prepayment comes either from mortgage termination or from curtailment, where the borrower retains the existing mortgage and prepays a portion. There are differences in cash flows from the two types of prepayment. In termination, the loan disappears from a pool, and the scheduled payment to investors in the pool is reduced. In curtailment, the loan survives, and the scheduled payment is unchanged but the term is reduced. There are implications for structuring mortgages and derivative securities. The prepayment decision is embedded in an in-tertemporal household utility maximization framework where choices are made between refinancing, making the regular payment, default or curtailment. Empirical results are presented for Government National Mortgage Association (GNMA) pools, and an algorithm is presented that separates the termination and curtailment components, facilitating the development of derivative securities.     

An empirical model of the market for resale homes

A model of the search process for a house is formulated, where both buyers and sellers are permitted adaptively to alter reservation prices. Houses on the market in a given period are sold or withdrawn or search for a buyer is continued. The empirical predictions are examined for single-family residential homes.     

Risk and the User Cost of Housing Services

This paper derives a risk-adjusted user cost for housing services, capable of application in price indexes, demand, and the measurement of income and returns to homeownership. The risk-adjusted user cost is the after-tax sum of an interest rate and a risk premium, less expected capital gains. Expected capital gains are based on a factor pricing specification. It is shown that both national and local factors affect capital gains on housing.     

Privatized Default Risk and Real Estate Recessions: The U.K. Mortgage Market

A mortgage pricing model is developed when a borrower goes through a series of distress states, including delinquency, long-term nonpayment and ultimate default. These steps are sequential, and depend on prices and alternatives faced by the borrower. The multistate default model is applied to the mortgage market in the United Kingdom. As a byproduct, a pricing structure for the U.K. endowment mortgage, which combines a good and a life insurance policy, is developed. Income and liquidity constraints are shown to affect the decision to keep a mortgage current in different states of distress. Solvent borrowers may thus keep their mortgages current, even when equity is negative.     

Home Equity,Household Savings and Consumption

The home-owning family’s equity is a piggybank that can be broken open by borrowing. Each borrowing increases liabilities and cash equally, initially leaving net wealth unchanged. When those funds are spent and cash balances fall, consumption increases even as net wealth can decline. In a dynamic optimization, the marginal propensity to consume from net wealth is not always positive and can be positively correlated with housing debt.

Housing Vouchers,Tenant Quality,and Apartment Values

Landlords face unique concerns in maximizing profits when they accept subsidized as well as unsubsidized tenants. Subsidized tenants come with lower rental collection risk because part or all of the rent is paid by a public agency and accepting subsidized tenants may widen the potential tenant market. But subsidized tenants tend to reduce overall tenant quality and to impose higher operating costs. By accepting subsidies, landlords may also subject themselves to periodic site inspections that may increase capital costs. Further, subsidized tenants may eventually crowd out unsubsidized tenants, lowering the average quality of the resident mix. Tests from Washington, DC apartments on accepting and advertising for Section 8 tenants support these qualitative predictions. Accepting Section 8 tenants enhances revenues, but advertising for them lowers revenues. More aggressive solicitation of subsidized tenants leads to a crowding out or displacement risk that dominates over any diminished collection risk.     

Jobs,location, and real estate

The decision to relocate has traditionally been based on job opportunities alone, with no attention paid to the real estate market. The cost of housing, its rate of return, and its specificity to a location do not enter the decision to move or stay. This article develops a more general definition of income, including real estate and labor markets. The null hypothesis is that relocation is based on comparing labor income differentials alone. The alternative is that income is more broadly based, including real estate returns. Estimates are provided in a quantal choice framework.     

Clientele Effects and Condo Conversions

During an asset boom a property can develop a new usage. Appreciation investors emerge to change a property's occupant mix or letter grade. Rental investors not intending to change the mix or grade are outbid. Sellers receive a capitalized premium from the new type of bidder. For apartments in Miami-Fort Lauderdale during 2004–2006, there is an asset pricing premium from condo converters. The price of real estate depends on clienteles in addition to characteristics.