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Editor: David Reiss
Cornell Law School

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February 18, 2016

Economic Factors That Affect Housing Prices

By David Reiss

photo by TaxRebate.org.uk

S&P has posted a paper on Economic Factors That Affect Housing Prices. This is, of course, an important topic, albeit one that is an art as well as a science. While S&P undertook this analysis more for mortgage-backed securities investors than for anyone else, it certainly is of use to the rest of us. The paper opens,

The U.S. domestic housing market has experienced a 23% price increase since the beginning of the housing recovery in 2011. Many local housing markets are now close to or above their peak levels of 2006, which leads us to investigate whether the pace of home price appreciation (HPA) can continue at its current pace. In this paper, we (1) examine the economic factors that influence HPA and (2) forecast HPA for numerous geographic regions assuming various economic conditions over the next five years. While the aggregate national pattern in housing prices is an important reference, we need to examine housing prices at a more granular geographic level in order to understand regional housing market dynamics and learn how these are affected by local macroeconomic factors. This paper demonstrates that several economic variables are needed to predict average home price movements for each of 48 different U.S. metropolitan statistical areas (MSAs).

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Factors that influence HPA can be difficult to predict. Therefore, residential mortgage backed securities (RMBS) investors frequently use a range of HPA projections to estimate their potential bond returns. With that in mind, for each MSA, we considered five separate hypothetical economic scenarios, ranging from an “Upside” forecast to an extreme “Stress 3” case. Interestingly, our Stress 3 case forecasts a 28% decline in HPI at the national level over the next five years, which corresponds roughly to the decline experienced in the last recession. Our “base case” scenario leads to forecasts at the national level of a 26% increase in HPI over five years. This represents what we believe to be the most likely economic forecast. (1-2)

S&P’s key findings include:

  • Movement in HPA is primarily influenced by up to five variables, depending on the MSA: housing affordability, changes in shadow inventory, the unemployment rate, the TED spread [a measure of distress in the credit markets], and population growth.
  • HPA in many MSAs has momentum, meaning that it depends on its level in the previous quarter of observation.
  • The mortgage rate generally appears to have little predictive power in connection with home prices.
  • Chicago, Houston, Boston, and San Francisco are projected to appreciate at a greater pace (45%, 40%, 27%, and 36%, respectively) than the 26% forecast for the nation as a whole over the next five years, and New York at a slower pace (21%). Columbus led all MSAs with a projected five-year HPA of 50%.
  • Under our most pessimistic (Stress 3) scenario, Chicago is forecast to experience a greater decline in HPI (34%) over the next five years than the nation as a whole (29%), while New York, Boston, Houston, and San Francisco are projected to experience declines that are less severe than that of the nation (19%, 3%, 17%, and 16%, respectively). Markets that have been vulnerable in the past (Las Vegas, Phoenix, and Riverside) are projected to experience the greatest five-year declines under our Stress 3 scenario (66%, 68%, and 68%). The markets that show the greatest movements are the most sensitive to the five factors and frequently show the greatest upside and downside. (2-3, emphasis in the original)

I found the first and third bullet points to be the most interesting, as many pundits weigh in on the factors that affect housing prices. It will be interesting to see if further research confirms S&P’s findings.

February 18, 2016 | Permalink | No Comments

Thursday’s Advocacy & Think Tank Roundup

By Shea Cunningham

  • Urban Institute released another brief on Choice Neighborhoods finding that a majority of children live in single-parent homes, in many of which the parent had not completed high school. In addition, families with children are more likely to use adult services, rather than child services.
  • Trulia released data finding that certain demographic groups have seen a very large shift from homeowners to renters in the 50 largest U.S. metros.

February 18, 2016 | Permalink | No Comments

February 17, 2016

Best Time to Sign a Lease

By David Reiss

photo by Beth Kanter

The Allstate Blog quoted me in What’s the Best Time of Year to Sign a Lease? It opens,

There is no way around it — apartment hunting can be stressful. And the cost of rent can be quite expensive — even outpacing average U.S. salary increases. According to the National Association of Realtors, the cost of rent rose an average of 15 percent while renters’ income only rose 11 percent from 2009 to 2014. However with some planning and negotiating, you may be able to have some more money in your pocket at the end of each month.

Similar to how you can pay more for a winter jacket in October than May, rental rates often vary throughout the year. By planning your move and signing lease terms to help position your next move during the lower rental rate season, you may end up saving some money. 

Research the Demand in Your Area

Just like most things, supply and demand determines prices in the rental market. Not surprisingly, you may get a better deal on renting when demand for condos or apartments are at their lowest. However, if you live in a tight rental market, your choices could be very limited. “In most areas the slow rental season is typically late fall through winter since less people move during this time,” says Scot J. Haislip, vice president, national lease program at the National Apartment Association (NAA).

It is important to understand the rental market you’re looking to move into since rental patterns can vary based on where you live. David Reiss, director of Community Development Clinic in New York City and professor at Brooklyn Law School, specializing in real estate and community development recommends contacting several local brokers to get their perspective on the slower rental periods in your area of interest. He also cautions that some high demand areas, such as New York City or Chicago, currently do not have a slower period for rentals.

Smart Negotiation

Even during the winter months, most landlords are not going to simply hand over a discount — you have to work for it by negotiating with your prospective landlord. Before you broach the subject of price, do your homework by picking up the phone or researching online to compare similar units at the current time. Reiss suggests that you consider asking for a decrease in your monthly rent or a period of free rent.

February 17, 2016 | Permalink | No Comments

Wednesday’s Academic Roundup

By Shea Cunningham

February 17, 2016 | Permalink | No Comments

February 16, 2016

10 Ways to Find Out About a Neighborhood

By David Reiss

neighborhood map

Realtor.com quoted me in 10 Ways to Find Out About a Neighborhood Without Being There. It reads, in part,

“So what’s the neighborhood really like?” is the ubiquitous refrain among home buyers shopping in areas they’re unfamiliar with. And though your real estate agent can fill lots of the big-picture details, it pays to do your research before committing to a residential purchase.

Short of stopping people on the street for intel—and being greeted by strange, skittish looks, or way worse—there are some far easier ways to get a feel for what living in a neighborhood is really like.

Best of all, you can even do them from afar (you’re welcome, relocators)! For starters, you can get local information on various neighborhoods on our site. Then for more deets, get digging in the resources below.

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For public transportation access …

Each day, 35 million Americans use public transportation, making access to it a must for, well, at least 35 million people. To check out an area’s accessibility to trains, buses, and light rail, David Reiss, a professor of law and research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School, recommends researching the Transit Score. “These scores are great, really giving you a sense of how important it is to have a car in a particular community,” he says.

For school quality …

Sure, a seller may tell you a local school is great. But don’t rely on bias when it comes to your child’s education. Instead, go to the nonprofit Greatschools.org and type in a potential ZIP code. You’ll have a chance to read school report cards crafted by reviews from teachers, parents, and even the students themselves. Or, if you already know which school district you want your child to attend, download realtor.com’s mobile app—you can search for homes by school district. 

For crime rates…

To see how safe it would be to set foot outside your home, enter your address into My Local Crime to pull up any recent local crimes from vandalism to shootings. Click on the map function to see where exactly those crimes were committed (in other words, maybe certain blocks to avoid after dark?).

For the lay of the land, literally…

When Professor Reiss asked students to find interesting web resources to learn about neighborhoods, they discovered that topological maps are a cool tool. Most maps show only a two-dimensional rendering. Topographical maps, which add the third dimension of elevation, show the surface and physical features of a given neighborhood. Besides highlighting hills and valleys, topography is important when it comes to weather events (just ask anyone in a flood plain).

February 16, 2016 | Permalink | No Comments

Tuesday’s Regulatory & Legislative Roundup

By Shea Cunningham

  • NYC Mayor Bill De Blasio released a new comprehensive zoning plan, arguing for taller buildings for affordable housing with fewer parking spaces.
  • The House Republicans have announced intent to form a six-committee task force to develop new policy agenda, including on issues of tax reform, poverty, opportunity and upward mobility.

February 16, 2016 | Permalink | No Comments

February 15, 2016

Lincoln at Independence Hall

By David Reiss

photo by Jeff Kubina

On President’s Day, it is worth sitting with the words of Abraham Lincoln, spoken at an address at Philadelphia’s Independence Hall in 1861:

I am filled with deep emotion at finding myself standing here, in this place, where were collected together the wisdom, the patriotism, the devotion to principle, from which sprang the institutions under which we live. You have kindly suggested to me that in my hands is the task of restoring peace to the present distracted condition of the country. I can say in return, Sir, that all the political sentiments I entertain have been drawn, so far as I have been able to draw them, from the sentiments which originated and were given to the world from this hall. I have never had a feeling politically that did not spring from the sentiments embodied in the Declaration of Independence. I have often pondered over the dangers which were incurred by the men who assembled here, and framed and adopted that Declaration of Independence. I have pondered over the toils that were endured by the officers and soldiers of the army who achieved that Independence. I have often inquired of myself, what great principle or idea it was that kept this Confederacy so long together. It was not the mere matter of the separation of the Colonies from the motherland; but that sentiment in the Declaration of Independence which gave liberty, not alone to the people of this country, but, I hope, to the world, for all future time. It was that which gave promise that in due time the weight would be lifted from the shoulders of all men. This is a sentiment embodied in the Declaration of Independence. Now, my friends, can this country be saved upon that basis? If it can, I will consider myself one of the happiest men in the world, if I can help to save it. If it cannot be saved upon that principle, it will be truly awful. But if this country cannot be saved without giving up that principle, I was about to say I would rather be assassinated on this spot than surrender it.

Now, in my view of the present aspect of affairs, there need be no bloodshed and war. There is no necessity for it. I am not in favor of such a course, and I may say, in advance, that there will be no bloodshed unless it be forced upon the Government, and then it will be compelled to act in self-defence.

My friends, this is wholly an unexpected speech, and I did not expect to be called upon to say a word when I came here. I supposed it was merely to do something toward raising the flag. I may, therefore, have said something indiscreet. I have said nothing but what I am willing to live by and, if it be the pleasure of Almighty God, die by.

February 15, 2016 | Permalink | No Comments

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