The Economic Implications of House Price Capitalization: A Synthesis

In this article, I synthesize an emerging literature that explores the conditions under which public and private investments and intergovernmental transfers are capitalized into local house prices and the broader economic implications of such capitalization. The main insights are: (1) house price capitalization is more pronounced in locations with strict regulatory and geographical supply constraints; (2) capitalization can induce the provision of durable local public goods and club goods; and (3) capitalization effects—which are habitually ignored by policy‐makers—have important adverse consequences for a wide range of policies such as intergovernmental aid and the mortgage interest deduction.     

The Effects of Assumption Financing Across Housing Price Categories

This study employs a standard housing valuation model to analyze the capitalization of below-market financing across housing price categories. The study also investigates the effect of secondary financing on housing prices and the effect of the expected holding period on discount capitalization. Using a randomly selected sample of 1981–82 housing transactions the study finds: the discount associated with below-market financing is inversely related to the absolute level of housing prices; secondary financing bears no systematic relationship to housing values; and discount capitalization is inversely related to the expected holding period.     

The capitalization of metro rail access in urban housing markets

Increasing access to public transportation (including metro rail) can help alleviate traffic congestion and address climate and environmental priorities. Living close to a metro line may be especially important in terms of providing improved commuting options. However, proximity to metro lines can also be associated with negative externalities, such as noise and crime, that may make living near a station less desirable. One way to assess the net value that residents place on metro rail access is to examine how proximity to metro lines is capitalized into house prices. Using a hedonic spatial difference-in-differences model, we analyze the impact of proximity to the stations on the Gold and Expo Lines in Los Angeles, California, on nearby house prices. Our findings suggest that the capitalization effect is heterogeneous. Some residents value living near new metro stations, while others do not. Overall, our results provide evidence that the value residents place on metro rail access varies based on their income levels and other demographics.     

Changes in REIT Liquidity 1990–1994: Evidence from Intra-day Transactions

This study uses data on intra-day transactions to analyze whether real estate investment (REIT) liquidity as measured by the bid-ask spread changed from 1990 to 1994, a period during which the industry's market capitalization increased from $8.7 billion to $45 billion. REIT percentage spreads (spread as percentage of share price) narrowed significantly, primarily attributable to higher share prices rather than narrower dollar-value spreads. An empirical model is used to analyze the determinants of percentage spreads. Return variance and share price, not market capitalization are found to be the primary determinants of percentage spreads in both periods. This suggests that the liquidity of REIT securities is similar to that of non-REIT securities with similar prices and return variance. In addition, percentage spreads are wider for REITs trading on the NASDAQ.     

Financing Residential Development with Special Districts

This paper empirically examines the extent to which the property tax liability created by financing residential infrastructure using special district bonds is capitalized in house prices. We compare house prices for single‐family detached homes built within development districts to similar properties located outside development districts. Our hedonic specification includes the usual housing characteristics and controls for the influence of spatial attributes using Census Block Group “neighborhood” fixed effects. The preferred empirical specification restricts the data to neighborhoods that have numerous sales of recently constructed single‐family detached homes located both within and outside development districts. The empirical results indicate that house prices for homes located within development districts are lower than house prices for similar homes located outside of development districts, but the amount of property tax capitalization is significantly less than full. Results depend on our Generalized Methods of Moments estimator, which instruments property tax rates using the characteristics of development districts. We identify valid instruments by restricting transactions to properties located in rapidly growing suburban developments.     

The external cost of prostitution: Evidence from shutting down red light districts in the Netherlands

This article examines the value of externalities created by the presence of sex workers in the city. Although a legal paid-sex industry might contribute to the economy, it may also generate negative externalities. To identify the net impact of overt prostitution, we estimate changes in housing prices following the sudden closure of the two red light districts (RLDs) in the Dutch City of Utrecht. Our results show that the capitalization effect of RLDs is spatially heterogeneous. While some areas are unaffected, others are up to 12% more expensive if far from operating brothels. Interestingly, though, evidence also shows that RLDs increase local employment in a variety of sectors. All the aversion to living near RLDs is instead explained by petty crimes.     

Flooding and Liquidity on the Bayou: The Capitalization of Flood Risk into House Value and Ease‐of‐Sale

The existing literature focuses on how perceived flood risk affects house value. Search theory, however, implies that flood risks will be capitalized into both house price and liquidity. This article draws on search theory to develop an empirical approach for estimating flood risk capitalization into both price and selling time. The results show the mix of price and liquidity capitalization varies by level of flood risk as well as across housing market phases. Regardless of the specific capitalization pattern, the results illustrate that focusing solely on price without allowing for concomitant liquidity capitalization can yield estimates that understate the full impact of flood risk on house transactions.     

Are Rising College Premiums Capitalized into House Prices? Evidence from China

Many areas in China experienced steeply rising house prices beginning in 2003. We test whether a change in local residency requirements may have played a role in driving up house prices in some places by tying access to Chinese universities to local homeownership status in the presence of a rising college premium. We generate a novel dataset that combines China housing market and neighborhood data with household and university admission data. We find evidence of capitalization effects and a sizable increase in the likelihood of homeownership postpolicy change in places with the greatest preferential access to China's elite universities.     

Heredity or Environment: Why is Automobile Longevity Increasing?

Over the past 25 years the longevity of automobiles has increased dramatically. We disentangle the rise in longevity into an embodied or inherent-durability effect and a disembodied effect (driven by the external environment, such as reduced accident rates or reductions in the prices of auto repair parts) and estimate these effects by year from 1950 through 1991. We find that the entire rise in auto longevity is due to some force disembodied from the cars themselves and offer some speculation about the nature of this external environment.     

The Effect of Subsidized Housing on Values of Adjacent Housing

This is a case study of the effect of subsidized housing on the value of adjacent non-subsidized housing. Four townhouse clusters in Fairfax County, Virginia, were selected for study because of the high degree of homogeneity between clusters. The clusters are all in the same community but vary in distance from subsidized housing. Sale prices were analyzed using a regression model which included distance from subsidized housing as an independent variable. Based on the results of the regression analysis, the authors conclude that the subsidized housing had a negative impact on the values of adjacent properties.     

油库区火灾应急过程风险因素-事故情景结构方程模型研究

为了探讨油库区火灾应急过程中风险因素与事故情景间的量化作用关系，揭示事故发展演化的基本规律，通过对近50年来国内外240例油库区典型火灾爆炸事故的统计分析，从人-物-环境-管理4个方面，建立了二者间的结构方程模型。结果表明：各因素与情景间影响关系显著，其中人的因素影响系数最大，为0.46，且对火灾扩大的情景影响更大，而“误判断”这一具体因素事件最易发生。所构建的结构方程模型能较清晰地量化应急过程风险因素与情景间的作用关系，可为揭示事故发生发展的作用机理提供一定的科学依据，同时为油库区火灾事故应急安全管理提供参考。     

Inflation and Housing Prices*

Home ownership is a claim on the stream of net rents. Like any income-producing asset, the market capitalizes its value. The price-rent multiple depends upon the expected growth rate of revenues and expenses, on financing terms, and on taxes. This paper derives this price-rent multiple in terms of these variables and calculates its value from 1963 through 1978. The results indicate that housing prices grew more rapidly than rents and the CPI largely as the result of a 33% increase in the price-rent multiple over those years. This increase in the capitalization rate occurred, despite higher nominal financing terms, because the relative terms of housing finance tended to ease and because the expected growth rate of rents increased more than its discount rate.     

Price communications in a multimarket context: An experimental investigation

This experiment assesses the effects of nonbinding price communications in a multi-market, posted-offer environment. In half of the ten sessions, three symmetric sellers continuously submitted nonbinding prices for two minutes prior to posting final binding prices. In the remaining sessions sellers posted only binding prices. Competitive prices were observed infrequently in either treatment, but prices were persistently higher when communications were possible. The way that communications affect performance is unclear. With or without communications, high prices appear to be more a consequence of some sellers supporting the defections of others, than of a developed language of conspiracy.We wish to thank without implicating Will Gillespie, participants in seminars at the Antitrust Division of the Department of Justice and at Virginia Commonwealth University, and an anonymous referee. Support for this research was provided by the USC Zumberge Faculty Research and Innovation Fund, the VCU Grants-In-Aid Program, and the National Science Foundation (grant SBR 9319842). Data are archived at FTP address: fido.econlab.arizona.edu.     

The effect of air traffic delays on airline prices

A legislative change in takeoff and landing restrictions at LaGuardia Airport provides an opportunity to study the effect of an exogenous shock to product quality on prices in the airline industry. I test how the price response varies with the degree of competition in the market. I find that prices fall by $1.42 on average for each additional minute of flight delay, and that the price response is substantially larger in more competitive markets.     

Homeownership Returns, Tenure Choice and Inflation

This paper empirically investigates the impact of inflation on homeownership returns and tenure choice when the assumptions underlying the user cost of housing are modified to reflect separately the effects of unanticipated and anticipated inflation. The analysis demonstrates that when the user cost model is specified to reflect the impact of anticipated inflation on house prices, the mortgage interest rate and the capitalization rate, the returns to homeownership are lower than determined by previous user cost studies and are consistent with a reasonably efficient market.     

Investor Rationality: Evidence from U.K. Property Capitalization Rates

Recent analyses have suggested the irrationality of Australian and U.S. office property investors in that they have failed to raise capitalization rates sufficiently at rental cyclical peaks to account for the obvious mean reversion in real rents and thus have significantly overvalued properties. In this article, we present a model of capitalization rates and explain U.K. office and retail cap rates in an error correction framework. We demonstrate that our proxies for expected real rental growth do, in fact, forecast future real growth and that cap rates reflect rational expectations of mean reversion in future real cash flows. Moreover, property cap rates are linked to the equity capitalization rate (dividend/price ratio) and expected real dividend growth in the expected manner.     

The Incidence of Property Taxes on Single-Family Housing*

The incidence of local property taxes, specifically the degree of capitalizing of property tax differentials in market prices, remains an unresolved question. The studies by Oates (1969) and McMillan and Carlson (1977) , which come to contradictory conclusions typify the diversity of opinion on the question. Many of the previous studies suffer from research design problems including, the use of census data for market values and property tax levels on real property; failure to control for differences in public services quality among the cities samples; and use of assessed value as a proxy for market price. A theoretical model in developed to explain the capitalization effect of property tax differentials within an urban area. Because the model is exactly identified, a single reduced from equation relating market value to a set of physical characteristics of the property and the level of property taxes can be estimated using ordinary least-squares techniques. The function is estimated using data drawn from 107 residential property sales made during 1976. Estimated parameters for the other equations then are determined indirectly. Actual market price and property tax data for each parcel ware used. It is found that property tax differentials on otherwise comparable properties are associated with significant market value differentials. Because the assessed value ranges from 7 to 20 percent of market value, the property tax procedure in the area studied appears to have randomly generated large capital gains for some and capital losses for others. Because of the limited data base, the statistical results are only indicative; the model, howevfer, should have wide applicability in a variety of questions concerning the incidence of property taxes.     

A Multivariate Commodity Analysis with Time-Dependent Volatility—Evidence from the German Energy Market

In recent years commodity markets (in particular electricity, coal, and emissions) encountered extreme price movements and phases of high price volatility. Utility companies are naturally exposed to these kinds of market movements and thus have to set-up an appropriate risk management system. We show that the nonstationary behavior of recent energy prices can be captured by time-dependent (and possibly stochastic) volatility models. We compare their statistical performance and their impact on risk management applications by calculating risk metrics such as value-at-risk. Based on a comprehensive backtesting study we conclude that our suggested models outperform stationary models in most cases and therefore should be considered superior for risk management applications.     

Integration of safety management effectiveness into QRA calculations

Quantitative Risk Analysis (QRA) has become an often used method in the process industry for improving safety and for land-use planning. In computing the risk by this methodology the frequency of an accident is often assessed by using generic failure frequencies which are based on historical data of incidents from databases. Little or no adjustment is made for the effectiveness of the safety management of the industrial site. Since most incidents are caused by management problems, QRA has to take into account the local safety management system. Otherwise, the results of QRA will not provide reliable information of the hazards and the corresponding risk from installations. Therefore, today's understanding of safe industrial operations requires an integrated risk assessment under the consideration of technical, organizational, and managerial aspects. This article describes a method which allows assessing the effectiveness of the local safety management system and its integration into the QRA using a single management factor. This method was developed with the aim of providing a tool which would allocate a quantitative measure for the effectiveness of the local Safety Management System for the purpose of using it directly in the QRA. © 2009 American Institute of Chemical Engineers Process Saf Prog, 2009     

The Impact of the Home Valuation Code of Conduct on Appraisal and Mortgage Outcomes

The accuracy of appraisals came into scrutiny during the housing crisis, and a set of policies and regulations was adopted to address the conflict‐of‐interest issues in the appraisal practices. In response to an investigation by the New York State Attorney General's office, the Home Valuation Code of Conduct (HVCC) was agreed to by Fannie Mae, Freddie Mac and the Federal Housing Finance Agency. Using unique data sets that contain both approved and nonapproved mortgage applications, this study provides an empirical examination of the impact of the HVCC on appraisal and mortgage outcomes. The results suggest that the HVCC has led to a reduction in the probability of inflated valuations, although valuations remained on average inflated, and induced a significant increase in the incidence of low appraisals. The well‐intentioned HVCC rule made it more difficult to obtain mortgages to purchase homes during the housing price crash, possibly exacerbating the fall in prices.