- Racial Discrepancy in Mortgage Interest Rates, by Ping Cheng, Zhenguo Lin, & Yingchun Liu, Journal of Real Estate Finance and Economics, Vol. 51, No. 1, 2015.
- House Prices, Local Demand, and Retail Prices, by Johannes Stroebel & Joseph Vavra, CEPR Discussion Paper No. DP10612.
- Housing Value Estimation: An Application of Forecast Combination to Residential Property Valuation, by Dennis Glennon, Hua Kiefer & Tom Mayock, May 18, 2015.
Tag Archives: house prices
Wednesday’s Academic Roundup
- The Boom, the Bust and the Future of Homeownership, by Stuart A. Gabriel & Stuart S. Rosenthal, Real Estate Economics, Vol. 43, Issue 2, pp. 334-374, 2015.
- Promoting ‘Inclusive Communities’: A Modified Approach to Disparate Impact Under the Fair Housing Act, by Cornelius Joseph Murray IV, Louisiana Law Review, Vol. 75, No. 213, 2014.
- How Low Can House Prices Go? Estimating a Conservative Lower Bound, by Alexander N. Bogin, Stephen Bruestle, & William M. Doerner, May 14, 2015.
- Strategic Mortgage Default: The Effect of Neighborhood Factors, by Michael G. Bradley, Amy Crews Cutts, & Wei Liu, Real Estate Economics, Vol. 43, Issue 2, pp. 271-299, 2015.
- An Agency Problem in the MBS Market and the Solicited Refinancing Channel of Large-Scale Asset Purchases, by John Kandrac & Bernd Schlusche, FEDS Working Paper No. 2015-027.
Wednesday’s Academic Roundup
- Rights at Risk in Privatized Public Housing, by Jaime Lee, Tulsa Law Review, Vol. 50, 2015, pp. 759-801.
- Making Firms Liable for Consumers’ Mistaken Beliefs: Theoretical Model and Empirical Applications to the U.S. Mortgage and Credit Card Markets, by Alexei Alexandrov, Consumer Financial Protection Bureau, Apr. 27, 2015.
- Discrimination at the Margins: The Intersectionality of Homelessness & Other Marginalized Groups, by Kaya Lurie, Breanne Schuster, & Sara Rankin, Seattle University School of Law, May 6, 2015.
- Supply Restrictions, Subprime Lending and Regional US House Prices, by André K. Anundsen & Christian Heebøll, Norges Bank Working Paper 18, 2014.
- Global Liquidity, House Prices and the Macroeconomy: Evidence from Advanced and Emerging Economies, by Ambrogio Cesa-Bianchi, Luis Felipe Céspedes, & Alessandro Rebucci, IDB Working Paper No. IDB-WP-576.
Mortgage Leverage and Bubbles
Albert Alex Zevelev has posted Regulating Mortgage Leverage: Fire Sales, Foreclosure Spirals and Pecuniary Externalities to SSRN. The abstract reads,
The US housing boom was accompanied by a rise in mortgage leverage. The subsequent bust was accompanied by a rise in foreclosure. This paper introduces a dynamic general equilibrium model to study how leverage and foreclosure affect house prices. The model shows how foreclosure sales, through their effect on housing supply, amplify and propagate house price drops. A calibration to match the bust shows consumption and housing need to be sufficiently complementary to fit the data. Since leverage plays a key role in foreclosure, a regulator can reduce systemic risk by placing a cap on leverage. Counterfactual experiments show that in a world with less leverage, the same economic shock leads to less foreclosure and less severe, shorter busts in house prices. A 90% cap on loan-to-value ratios in 2006 predicts house prices would have fallen 12% rather than 18% as in the data. The regulator faces a trade-off in that less leverage means less housing for constrained households, but also fewer foreclosures and less severe busts in house prices. A regulator with reasonable preference parameters would choose a cap of 95%.
This is pretty important stuff as it attempts to model the impact of different LTV ratios on prices and foreclosure rates. Now Zevelev is not the first to see these interactions, but it is important to model how consumer finance regulation (for instance, loan to value ratios) can impact systemic risk. This is particularly important because many commentators downplay that relationship.
I am not in a position to evaluate the model in this paper, but its conclusion is certainly right: “Leverage makes our economy fragile by increasing the risk of default. It is clear that
foreclosure has many externalities and they are quantitatively significant. Since borrowers
and lenders do not fully internalize these externalities, there is a case for regulating mortgage leverage.” (31)
Reiss on Paying off Underwater Mortgages
MainStreet.com quoted me in What Bills Should You Pay First? It reads in part,
Consumers started prioritizing their mortgage payments ahead of their credit card payments as of September 2013, according to a new TransUnion study.
This reverses a trend that began in September 2008 when the mortgage crisis drove consumers to pay their credit cards bills ahead of mortgages. Consumers have placed an emphasis on paying their auto loans before their mortgages and credit card payments by a wide margin – since at least 2003, TransUnion said. The study obtained anonymous consumer information from December 2002 through December 2012, and each monthly sample included about 2.5 million consumers.
* * *
Many consumers were faced with devaluing home prices and chose to preserve their credit line, said David Reiss, professor of law at Brooklyn Law School in New York.
“The underwater mortgage may have seemed like a sinkhole when prices were dropping and putting limited funds into it might have seemed like throwing good money after bad,” he said. “When a household’s income can’t cover all of its expenses, it has to prioritize its payments. If the mortgage is underwater, it may make sense to use those limited funds to protect assets that are integral to daily living and wage earning like an auto or to focus on tools like credit cards that may have some use going forward, if there is still any available credit left.”
Homeowners have reversed that logic with the rebound of housing prices, Reiss said.”If homeowners have equity in their home from those rising prices, prioritizing the mortgage protects that equity and keeps the household in the house to boot,” he said. “Not everyone makes such a calculation, but many do.”
