In early December of 2018 we published a discussion on the significant and dominant influence of ... more In early December of 2018 we published a discussion on the significant and dominant influence of price trends on mortgage default rates. There we noted that home price changes, analyzed at the zip code level, were a significant driver of default rates and were especially dominant when the loan to value ratios were relatively high. Here, we continue the analysis using the change from the peak to the trough of prices over the period of 2005 through 2018 for a variety of CBSAs. Again, we see a very strong impact on residential mortgage backed securities (RMBS) default rates from average property price declines. For the aggregate of all of the zip codes in all of the CBSAs shown below, we see a correlation between the default rate and peak to trough price decline of -0.74. We show all of these markets in aggregate in Exhibit 1 below with a trend line inserted. Default rates climb significantly when peak to trough prices decline more than -20%. This is consistent with typical loan to value, LTV, ratios and shows why conservative loans will be at 80% LTV or below
The neighborhood impact of subprime lending, predatory lending and foreclosure has been estimated... more The neighborhood impact of subprime lending, predatory lending and foreclosure has been estimated at two to ten percent of home value. Further, as some neighborhoods see a concentration of foreclosures, the number of distressed properties in close proximity to a given property also has an impact on home value. Empirical evidence suggests that home values decline by one percent on average for each nearby distressed home. Extrapolated across the national housing stock, this translates into a 1 to 10% (or $5,000 average) spillover effect. We discuss current research in this area and identify gaps in the literature in the wake of the subprime mortgage crisis.
If realized house prices have the wealth effect and the collateral effect on the economy, anticip... more If realized house prices have the wealth effect and the collateral effect on the economy, anticipated house price changes should have similar economic effects. This paper empirically analyzes the effects of single family home sales, which are shown to be able to predict house prices in the literature, on economic production, using 372 Metropolitan Statistic Areas in the U.S. from the first quarter of 1981 to the second quarter of 2008 in a panel Vector Error Correction Model. Changes in home sales are found to Granger cause the growth rate of per capita Gross Metropolitan Product, and the dynamic effects are visualized with impulse response functions. Supporting evidence for the economic impact of home sales is also found in contemporaneous regressions. House price changes appear to have significant effects on the economy. Friedman's permanent income hypothesis implies that home owners would increase (decrease) their consumption if home values, and thus their expected life time wealth, increase (decrease). Recent research (Aoki, Proudman and Vlieghe ( ), Lustig and Nieuwerburgh (2010), and Ortalo-Magné and Rady ( ), among others) suggests that increases in home values may help relax home owners' borrowing constraints and thus increase their consumption. The literature generally provides supporting evidence for both the wealth effect and the collateral effect. A strong correlation between house prices and consumption is found at both the aggregate level (see, e.g., Jud (2004), Case, Quigley and) and the household level (see, e.g., Bostic, Gabriel and Painter (2009). Miller, Peng and Sklarz (2010) find a strong relationship between house prices and economic production using panel data of all Metropolitan Statistic Areas (MSA) in the U.S., and that the collateral effect is about three times stronger than the wealth effect.
The Journal of Real Estate Finance and Economics, 2009
Using quarterly data for all 379 metropolitan statistic areas (MSAs) in the U.S. from 1980:1 to 2... more Using quarterly data for all 379 metropolitan statistic areas (MSAs) in the U.S. from 1980:1 to 2008:2, this paper empirically studies the effect of house prices on local Gross Metropolitan Product (GMP). We compare the effects of predictable and unpredictable house price changes, which we use to capture the collateral and wealth effects of house prices respectively. We further analyze the relationship between the effects and household borrowing constraints, as well as the temporal pattern of the effects. Our analysis provides the following findings. First, house price changes have significant effects on GMP growth, and the effect of predictable changes (the collateral effect) is about three times stronger than the effect of unpredictable changes (the wealth effect). Second, the persistent component of predictable changes has a stronger collateral effect than the novel component. Third, when households are more financially constrained, the collateral effect is stronger, the wealth effect is weaker, and the total effect remains unchanged. Finally, the effects last for eight quarters, and peak on the fourth quarter after house price changes take place. Keywords Economic growth. House prices. Wealth effect. Collateral effect. Common correlated effects estimators. Long horizon predictability JEL classification E23. E24. R11
This study attempts to detect seasonality in home prices at the Core Base Statistical Area (CBSA)... more This study attempts to detect seasonality in home prices at the Core Base Statistical Area (CBSA) level. Using a unique database of home sales from over 270 CBSAs over the last ten years, we study if monthly home prices vary significantly during the year. Using a hedonic pricing model to account for housing characteristics and dummy variables for months, our findings indicate significant price variations during the year for most CBSAs around the country. At the aggregate level, the monthly price changes vary from an average of -6.13% on the downside to 1.55% on the upside. This study finds two factors affecting price changes: one if the CBSA is a tourist destination or not; the other the geographic region.
Research on many consumer goods has indicated that pricing strategies may influence perceptions o... more Research on many consumer goods has indicated that pricing strategies may influence perceptions of quality. Whether such perceptions exist for large assets like real estate, which may therefore allow strategies to influence selling prices is the subject of this study. Large high-rise centrally-located condominium data is used to test whether asking prices are an indicator of value to buyers.
Indiana University Kelley School of Business Research Paper Series, 2008
Much attention has been paid to capitalization rates or cap rates defined as the net operating in... more Much attention has been paid to capitalization rates or cap rates defined as the net operating income over transaction price, also known as a going-in current yield on commercial real estate when calculated at the time of purchase. There are a number of global factors that drive capital markets and required rates of return that help to explain observed cap rates over time, but little is known about the factors driving the geographical cross-sectional variation of these cap rates. This paper uses data from Real Capital Analytics for multifamily properties to explore several models that combine the expected influences from housing demand growth, supply constraints, liquidity risk, and the interaction of these. The findings reveal that there is a very strong and robust relation between supply constraints and cap rates, as well as evidence of capital flowing from larger markets to smaller markets in recent years. The findings also reveal weak but generally supportive evidence of influen...
This research examines how well nominal income, nominal interest rates and employment explain tem... more This research examines how well nominal income, nominal interest rates and employment explain temporal variation in nominal metropolitan area house prices. Rather than use a traditional model of real house prices, we explain nominal house prices with a measure of "intrinsic" house value that combines local economic factors with an affordable price based upon what the local median income household could afford to pay at prevailing interest rates. The affordable price variable captures local household income trends and current interest rates. We then relate temporal variation in observed house prices to "intrinsic" value and estimate the parameters of separate autoregressive house price models for 316 cities. Like Capozza,
K e y w o r d s Climate change; sea level rise; flood risks; housing prices With growing certaint... more K e y w o r d s Climate change; sea level rise; flood risks; housing prices With growing certainty over climate change impacts in the absence of coordinated mitigation, we investigate whether housing markets are adapting to these likely impacts. In 2018, the Intergovernmental Panel on Climate Change (IPCC), which collates global research, released a special report on the expected impacts of climate change associated with a global 1.58C temperature increase above preindustrial levels, an outcome the panel describes with high confidence as ‘‘likely’’ (Masson-Delmotte et al., 2018). Relevant to this study, the report describes ‘‘high confidence’’ global impacts, which include sea level rise, increases in mean temperature, and increases in ocean temperature, as well as ‘‘medium confidence’’ regional impacts including increased precipitation (storms). Additionally, the U.S. National Climate Assessment, released in November 2018 (U.S. Global Change Research Program, 2018), projects betwee...
Property condition has a significant influence on property value, yet is not a widely used variab... more Property condition has a significant influence on property value, yet is not a widely used variable in pricing models. Using approximately 322,433 residential sales from over 1,300 different U.S. counties over 2012–2015, we find that price spreads for quality differences tend to be lower when market conditions are strong. However, when market conditions weaken, the price changes are relatively larger on the highest quality property condition segment. Lastly, we find that the marginal benefit of including property condition when age is known is worthwhile if the subject property is unusual for the neighborhood. Based on these results, valuation models might be improved slightly with additional information on property condition, especially if a property is in much better or worse condition than is typical for the comparable sales in the neighborhood.
There seems to be a market for doom and gloom writing and reporting. Extreme views grab attention... more There seems to be a market for doom and gloom writing and reporting. Extreme views grab attention and this will never change, but our concern is that we are entering a period of contagion effects where psychology impacts the downward housing slide as much as fundamentals. And this raises a more important problem: Who is telling the truth? How accurate is the data that is being used to make these gloomy predictions? Unfortunately the consumer of real estate information is left to struggle with misinformation, exaggerations or even outright falsehoods. The housing market as discussed in the media is almost like the rhetoric of a President campaign where context is often lost.
In the Webb and Rubens article on homeowner rates of returns (Journal of Real Estate Research 2:2... more In the Webb and Rubens article on homeowner rates of returns (Journal of Real Estate Research 2:2), they use a model that tends to underestimate the true returns to housing. Both their model and assumptions are reviewed in the discussion below, and modified using the identical data, to show the extent of the bias, and a more realistic result.
Much attention has been paid to capitalization rates or “cap rates?defined as the net operating... more Much attention has been paid to capitalization rates or “cap rates?defined as the net operating income over transaction price, also known as a “going-in?current yield on commercial real estate when calculated at the time of purchase. We know that there are a number of global factors that drive capital markets and required rates of return that help to explain observed cap rates over time, but we know little about factors driving the geographical cross-sectional variation of these cap rates. Why are cap rates for similar sized and type property so much lower or higher in one metropolitan statistical area than another? Using data from Real Capital Analytics for multifamily properties we explore several models that combine the expected influences from housing demand growth, supply constraints, liquidity risk and the interaction of these. We document a very strong and robust relation between supply constraints and cap rates as well as evidence of capital flowing from larger markets t...
This study detects seasonality in home prices at the Core Base Statistical Area (CBSA) level. Usi... more This study detects seasonality in home prices at the Core Base Statistical Area (CBSA) level. Using a unique database of home sales from 138 CBSAs from February 2000 to April 2011, we explore if monthly home prices vary systemically and significantly. Using a hedonic pricing model to account for housing characteristics and the standard HP filter system to extract the trend and the cyclical/seasonality component of the prices, the findings indicate significant price variations during the year for most months and most markets. At the aggregate level, the monthly price changes vary from an average of -2.78% on the downside to 1.93% on the upside. Aside from weather-induced seasonality and the geographic region, we find some differences in patterns based on whether or not the CBSA is a tourist destination.
This research examines how well nominal income, nominal interest rates and employment explain tem... more This research examines how well nominal income, nominal interest rates and employment explain temporal variation in nominal metropolitan area house prices. Rather than use a traditional model of real house prices, we explain nominal house prices with a measure of "intrinsic" house value that combines local economic factors with an affordable price based upon what the local median income household could afford to pay at prevailing interest rates. The affordable price variable captures local household income trends and current interest rates. We then relate temporal variation in observed house prices to "intrinsic" value and estimate the parameters of separate autoregressive house price models for 316 cities. We observe that the coastal markets exhibit much greater appreciation/ depreciation rates and much more volatility than cities in the central portions of the country. Here we focus primarily on the impact of interest rates on nominal prices in various MSAs, a ...
Several luxury single-family home markets in Hawaii have experienced significant price movements ... more Several luxury single-family home markets in Hawaii have experienced significant price movements in 1987 and 1988, along with a tremendous influx of Japanese buyers. Most noteworthy is the Waialae-Kahala neighborhood in Honolulu, where average price increases of over 60% in the past two years have occurred. This surge in prices has stimulated a great deal of speculative interest. The purpose of this article is to examine the effect of exchange rates (yen/dollar) and Japanese buyers on selected residential market prices and turnover. Using the most exhaustive and complete data set available in Hawaii covering 1986 through early 1988, hedonic pricing models as well as descriptive statistics are used to examine the effects of strong foreign interest in local housing submarkets.
In early December of 2018 we published a discussion on the significant and dominant influence of ... more In early December of 2018 we published a discussion on the significant and dominant influence of price trends on mortgage default rates. There we noted that home price changes, analyzed at the zip code level, were a significant driver of default rates and were especially dominant when the loan to value ratios were relatively high. Here, we continue the analysis using the change from the peak to the trough of prices over the period of 2005 through 2018 for a variety of CBSAs. Again, we see a very strong impact on residential mortgage backed securities (RMBS) default rates from average property price declines. For the aggregate of all of the zip codes in all of the CBSAs shown below, we see a correlation between the default rate and peak to trough price decline of -0.74. We show all of these markets in aggregate in Exhibit 1 below with a trend line inserted. Default rates climb significantly when peak to trough prices decline more than -20%. This is consistent with typical loan to value, LTV, ratios and shows why conservative loans will be at 80% LTV or below
The neighborhood impact of subprime lending, predatory lending and foreclosure has been estimated... more The neighborhood impact of subprime lending, predatory lending and foreclosure has been estimated at two to ten percent of home value. Further, as some neighborhoods see a concentration of foreclosures, the number of distressed properties in close proximity to a given property also has an impact on home value. Empirical evidence suggests that home values decline by one percent on average for each nearby distressed home. Extrapolated across the national housing stock, this translates into a 1 to 10% (or $5,000 average) spillover effect. We discuss current research in this area and identify gaps in the literature in the wake of the subprime mortgage crisis.
If realized house prices have the wealth effect and the collateral effect on the economy, anticip... more If realized house prices have the wealth effect and the collateral effect on the economy, anticipated house price changes should have similar economic effects. This paper empirically analyzes the effects of single family home sales, which are shown to be able to predict house prices in the literature, on economic production, using 372 Metropolitan Statistic Areas in the U.S. from the first quarter of 1981 to the second quarter of 2008 in a panel Vector Error Correction Model. Changes in home sales are found to Granger cause the growth rate of per capita Gross Metropolitan Product, and the dynamic effects are visualized with impulse response functions. Supporting evidence for the economic impact of home sales is also found in contemporaneous regressions. House price changes appear to have significant effects on the economy. Friedman's permanent income hypothesis implies that home owners would increase (decrease) their consumption if home values, and thus their expected life time wealth, increase (decrease). Recent research (Aoki, Proudman and Vlieghe ( ), Lustig and Nieuwerburgh (2010), and Ortalo-Magné and Rady ( ), among others) suggests that increases in home values may help relax home owners' borrowing constraints and thus increase their consumption. The literature generally provides supporting evidence for both the wealth effect and the collateral effect. A strong correlation between house prices and consumption is found at both the aggregate level (see, e.g., Jud (2004), Case, Quigley and) and the household level (see, e.g., Bostic, Gabriel and Painter (2009). Miller, Peng and Sklarz (2010) find a strong relationship between house prices and economic production using panel data of all Metropolitan Statistic Areas (MSA) in the U.S., and that the collateral effect is about three times stronger than the wealth effect.
The Journal of Real Estate Finance and Economics, 2009
Using quarterly data for all 379 metropolitan statistic areas (MSAs) in the U.S. from 1980:1 to 2... more Using quarterly data for all 379 metropolitan statistic areas (MSAs) in the U.S. from 1980:1 to 2008:2, this paper empirically studies the effect of house prices on local Gross Metropolitan Product (GMP). We compare the effects of predictable and unpredictable house price changes, which we use to capture the collateral and wealth effects of house prices respectively. We further analyze the relationship between the effects and household borrowing constraints, as well as the temporal pattern of the effects. Our analysis provides the following findings. First, house price changes have significant effects on GMP growth, and the effect of predictable changes (the collateral effect) is about three times stronger than the effect of unpredictable changes (the wealth effect). Second, the persistent component of predictable changes has a stronger collateral effect than the novel component. Third, when households are more financially constrained, the collateral effect is stronger, the wealth effect is weaker, and the total effect remains unchanged. Finally, the effects last for eight quarters, and peak on the fourth quarter after house price changes take place. Keywords Economic growth. House prices. Wealth effect. Collateral effect. Common correlated effects estimators. Long horizon predictability JEL classification E23. E24. R11
This study attempts to detect seasonality in home prices at the Core Base Statistical Area (CBSA)... more This study attempts to detect seasonality in home prices at the Core Base Statistical Area (CBSA) level. Using a unique database of home sales from over 270 CBSAs over the last ten years, we study if monthly home prices vary significantly during the year. Using a hedonic pricing model to account for housing characteristics and dummy variables for months, our findings indicate significant price variations during the year for most CBSAs around the country. At the aggregate level, the monthly price changes vary from an average of -6.13% on the downside to 1.55% on the upside. This study finds two factors affecting price changes: one if the CBSA is a tourist destination or not; the other the geographic region.
Research on many consumer goods has indicated that pricing strategies may influence perceptions o... more Research on many consumer goods has indicated that pricing strategies may influence perceptions of quality. Whether such perceptions exist for large assets like real estate, which may therefore allow strategies to influence selling prices is the subject of this study. Large high-rise centrally-located condominium data is used to test whether asking prices are an indicator of value to buyers.
Indiana University Kelley School of Business Research Paper Series, 2008
Much attention has been paid to capitalization rates or cap rates defined as the net operating in... more Much attention has been paid to capitalization rates or cap rates defined as the net operating income over transaction price, also known as a going-in current yield on commercial real estate when calculated at the time of purchase. There are a number of global factors that drive capital markets and required rates of return that help to explain observed cap rates over time, but little is known about the factors driving the geographical cross-sectional variation of these cap rates. This paper uses data from Real Capital Analytics for multifamily properties to explore several models that combine the expected influences from housing demand growth, supply constraints, liquidity risk, and the interaction of these. The findings reveal that there is a very strong and robust relation between supply constraints and cap rates, as well as evidence of capital flowing from larger markets to smaller markets in recent years. The findings also reveal weak but generally supportive evidence of influen...
This research examines how well nominal income, nominal interest rates and employment explain tem... more This research examines how well nominal income, nominal interest rates and employment explain temporal variation in nominal metropolitan area house prices. Rather than use a traditional model of real house prices, we explain nominal house prices with a measure of "intrinsic" house value that combines local economic factors with an affordable price based upon what the local median income household could afford to pay at prevailing interest rates. The affordable price variable captures local household income trends and current interest rates. We then relate temporal variation in observed house prices to "intrinsic" value and estimate the parameters of separate autoregressive house price models for 316 cities. Like Capozza,
K e y w o r d s Climate change; sea level rise; flood risks; housing prices With growing certaint... more K e y w o r d s Climate change; sea level rise; flood risks; housing prices With growing certainty over climate change impacts in the absence of coordinated mitigation, we investigate whether housing markets are adapting to these likely impacts. In 2018, the Intergovernmental Panel on Climate Change (IPCC), which collates global research, released a special report on the expected impacts of climate change associated with a global 1.58C temperature increase above preindustrial levels, an outcome the panel describes with high confidence as ‘‘likely’’ (Masson-Delmotte et al., 2018). Relevant to this study, the report describes ‘‘high confidence’’ global impacts, which include sea level rise, increases in mean temperature, and increases in ocean temperature, as well as ‘‘medium confidence’’ regional impacts including increased precipitation (storms). Additionally, the U.S. National Climate Assessment, released in November 2018 (U.S. Global Change Research Program, 2018), projects betwee...
Property condition has a significant influence on property value, yet is not a widely used variab... more Property condition has a significant influence on property value, yet is not a widely used variable in pricing models. Using approximately 322,433 residential sales from over 1,300 different U.S. counties over 2012–2015, we find that price spreads for quality differences tend to be lower when market conditions are strong. However, when market conditions weaken, the price changes are relatively larger on the highest quality property condition segment. Lastly, we find that the marginal benefit of including property condition when age is known is worthwhile if the subject property is unusual for the neighborhood. Based on these results, valuation models might be improved slightly with additional information on property condition, especially if a property is in much better or worse condition than is typical for the comparable sales in the neighborhood.
There seems to be a market for doom and gloom writing and reporting. Extreme views grab attention... more There seems to be a market for doom and gloom writing and reporting. Extreme views grab attention and this will never change, but our concern is that we are entering a period of contagion effects where psychology impacts the downward housing slide as much as fundamentals. And this raises a more important problem: Who is telling the truth? How accurate is the data that is being used to make these gloomy predictions? Unfortunately the consumer of real estate information is left to struggle with misinformation, exaggerations or even outright falsehoods. The housing market as discussed in the media is almost like the rhetoric of a President campaign where context is often lost.
In the Webb and Rubens article on homeowner rates of returns (Journal of Real Estate Research 2:2... more In the Webb and Rubens article on homeowner rates of returns (Journal of Real Estate Research 2:2), they use a model that tends to underestimate the true returns to housing. Both their model and assumptions are reviewed in the discussion below, and modified using the identical data, to show the extent of the bias, and a more realistic result.
Much attention has been paid to capitalization rates or “cap rates?defined as the net operating... more Much attention has been paid to capitalization rates or “cap rates?defined as the net operating income over transaction price, also known as a “going-in?current yield on commercial real estate when calculated at the time of purchase. We know that there are a number of global factors that drive capital markets and required rates of return that help to explain observed cap rates over time, but we know little about factors driving the geographical cross-sectional variation of these cap rates. Why are cap rates for similar sized and type property so much lower or higher in one metropolitan statistical area than another? Using data from Real Capital Analytics for multifamily properties we explore several models that combine the expected influences from housing demand growth, supply constraints, liquidity risk and the interaction of these. We document a very strong and robust relation between supply constraints and cap rates as well as evidence of capital flowing from larger markets t...
This study detects seasonality in home prices at the Core Base Statistical Area (CBSA) level. Usi... more This study detects seasonality in home prices at the Core Base Statistical Area (CBSA) level. Using a unique database of home sales from 138 CBSAs from February 2000 to April 2011, we explore if monthly home prices vary systemically and significantly. Using a hedonic pricing model to account for housing characteristics and the standard HP filter system to extract the trend and the cyclical/seasonality component of the prices, the findings indicate significant price variations during the year for most months and most markets. At the aggregate level, the monthly price changes vary from an average of -2.78% on the downside to 1.93% on the upside. Aside from weather-induced seasonality and the geographic region, we find some differences in patterns based on whether or not the CBSA is a tourist destination.
This research examines how well nominal income, nominal interest rates and employment explain tem... more This research examines how well nominal income, nominal interest rates and employment explain temporal variation in nominal metropolitan area house prices. Rather than use a traditional model of real house prices, we explain nominal house prices with a measure of "intrinsic" house value that combines local economic factors with an affordable price based upon what the local median income household could afford to pay at prevailing interest rates. The affordable price variable captures local household income trends and current interest rates. We then relate temporal variation in observed house prices to "intrinsic" value and estimate the parameters of separate autoregressive house price models for 316 cities. We observe that the coastal markets exhibit much greater appreciation/ depreciation rates and much more volatility than cities in the central portions of the country. Here we focus primarily on the impact of interest rates on nominal prices in various MSAs, a ...
Several luxury single-family home markets in Hawaii have experienced significant price movements ... more Several luxury single-family home markets in Hawaii have experienced significant price movements in 1987 and 1988, along with a tremendous influx of Japanese buyers. Most noteworthy is the Waialae-Kahala neighborhood in Honolulu, where average price increases of over 60% in the past two years have occurred. This surge in prices has stimulated a great deal of speculative interest. The purpose of this article is to examine the effect of exchange rates (yen/dollar) and Japanese buyers on selected residential market prices and turnover. Using the most exhaustive and complete data set available in Hawaii covering 1986 through early 1988, hedonic pricing models as well as descriptive statistics are used to examine the effects of strong foreign interest in local housing submarkets.
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Papers by Michael Sklarz