Property, Properly Understood

Kevin Lewis

September 01, 2009

Unlearned Lessons from the Housing Bubble

Robert Shiller
The Economists' Voice, July 2009

"Many people all over the world seem to have thought that since we are running out of land in a rapidly growing world economy, the prices of houses and apartments should increase at huge rates. That misunderstanding encouraged people to buy homes for their investment value — and thus was a major cause of the real estate bubbles around the world whose collapse fueled the current economic crisis. This misunderstanding may also contribute to an increase in home prices again, after the crisis ends. Indeed, some people are already starting to salivate at the speculative possibilities of buying homes in currently depressed markets. But we do not really have a land shortage. Every major country of the world has abundant land in the form of farms and forests, much of which can be converted someday into urban land. Less than 1% of the earth's land area is densely urbanized, and even in the most populated major countries, the share is less than 10%. There are often regulatory barriers to converting farmland into urban land, but these barriers tend to be thwarted in the long run if economic incentives to work around them become sufficiently powerful...Despite a huge twenty-first century boom in cropland prices in the U.S. that parallels the housing boom of the 2000s, the average price of a hectare of cropland was still only $6,800 in 2008, according to the U.S. Department of Agriculture, and one could build 10-20 single-family houses surrounded by comfortable-sized lots on this land, or one could build an apartment building housing 300 people. Land costs could easily be as low as $20 per person, or less than $0.50 per year over a lifetime. Of course, such land may not be in desirable locations today, but desirable locations can be created by urban planning. Many people seem to think that the U.S. experience is not generalizable, because the U.S. has so much land relative to its population...But, to the extent that the products of land (food, timber, ethanol) are traded on world markets, the price of any particular kind of land should be roughly the same everywhere...Shortages of construction materials do not seem to be a reason to expect high home prices, either. For example, in the U.S., the Engineering News Record Building Cost Index (which is based on prices of labor, concrete, steel, and lumber) has actually fallen relative to consumer prices over the past 30 years. To the extent that there is a world market for these factors of production, the situation should not be entirely different in other countries."


Yet Another View on Why a Home Is One's Castle

Fuad Hasanov & Douglas Dacy
Real Estate Economics, Spring 2009, Pages 23-41

We compute equity-based real after-tax rates of return for homeowners and landlords in the United States for 1952-2005. The study confirms that a combined aggregate for residential housing provides a high average net return and low volatility, has low correlation with financial assets and can provide a hedge against inflation. The efficient frontier analysis shows that the optimal portfolio for a household with a coefficient of relative risk aversion of four to five is one which contains a bit larger amount of housing than stocks, close to what one observes in the real world.


The Impact Of Deregulation And Financial Innovation On Consumers: The Case Of The Mortgage Market

Kristopher Gerardi, Harvey Rosen & Paul Willen
Journal of Finance, forthcoming

We develop a technique for assessing the impact of changes in the mortgage market on households. We start with an implication of the permanent income hypothesis: that the higher a household's expected future income, the more it desires to consume, ceteris paribus. If perfect credit markets exist, desired consumption matches actual consumption and current spending forecasts future income. Since credit market imperfections mute this effect, the strength of the relationship between house spending and future income measures the "imperfectness" of mortgage markets. Using micro-data, we find that over the past several decades, housing markets have become less imperfect in this sense. Mortgage securitization has played an important role in explaining this phenomenon.


The Housing Crisis and Bankruptcy Reform: The Prepackaged Chapter 13 Approach

Eric Posner & Luigi Zingales
University of Chicago Working Paper, March 2009

The housing crisis threatens to destroy hundreds of billions of dollars of value by causing homeowners with negative equity to walk away from their houses. A house in foreclosure is worth 30 to 50 percent less than a house that a homeowner either retains or sells on the market, and a foreclosed house damages neighboring property values as well. We advocate a reform of Chapter 13 that would allow homeowners to strip down the value of their mortgages in a prepackaged bankruptcy. Such a plan would give homeowners an incentive to keep or resell their homes, thus reducing the market value loss of homes while protecting the effective value of creditors' interests. Two further key elements of the plan are that it uses prices based on the average house price in a particular ZIP code, which reduces moral hazard; and it is automated, requiring only a rubber stamp by a bankruptcy judge or other official, thus preserving judicial resources. Other plans, including that of the Obama administration, are compared.


Consumer Bankruptcy and Default: The Role of Individual Social Capital

Sumit Agarwal, Souphala Chomsisengphet & Chunlin Liu
Federal Reserve Bank Working Paper, May 2009

An individual's decision to maximize his investment in social capital is determined by his socioeconomic characteristics, such as homeownership and mobility (Glaeser, Laibson, and Sacerdote, 2002). In this paper, we empirically assess the role of individual social capital formation characteristics on personal bankruptcy and default outcomes in the consumer credit market. After controlling for a borrower's risk score, debt, income, wealth, and legal and economic environments, we find that default/bankruptcy risk rises and then falls over the lifecycle, while a borrower who owns a home or is married has a lower risk of default/bankruptcy. Moreover, a borrower who migrates 190 miles from his "state of birth" is 17 percent more likely to default and 15 percent more likely to file for bankruptcy, while a borrower who continues to live in his state of birth is 14 and 10 percent less likely to default and file for bankruptcy, respectively. A borrower who moves to a rural area is 9 and 7 percent less likely to default and declare bankruptcy, respectively. We also find that measures of social networks, norms, and cooperation and trust (i.e., aggregate social capital) are inversely related to consumer bankruptcy.


Homeownership and Child Welfare

David Barker & Eric Miller
Real Estate Economics, Summer 2009, Pages 279-303

Recent studies have concluded that homeownership is beneficial to children. This result is important because it is used to justify large government subsidies that encourage homeownership. We reexamine the results of two of the most prominent of these studies using the Panel Study of Income Dynamics, Public Use Microsample, and National Longitudinal Survey of Youth data. We extend this research by controlling for residential mobility, wealth, dwelling type and vehicle ownership, as well as by using a "differences in differences" methodology to deal with possible treatment effects bias. We find that the beneficial effects of homeownership previously measured are substantially reduced or eliminated by controlling for these factors. We confirm these results using data from the Early Childhood Longitudinal Study.


Can an Islamic Model of Housing Finance Cooperative Elevate the Economic Status of the Underprivileged?

Shahid Ebrahim
Journal of Economic Behavior & Organization, forthcoming

A formal home loan is onerous to subprime borrowers in efficient markets. This can deter homeownership for financially strapped individuals, leading to a market failure. This paper proposes a special form of cooperative mortgage financing (practiced in Oman) to overcome this market failure. We integrate the literature of Mortgage Design with that of informal savings schemes (i.e., ROSCAs/ ASCRAs) to illustrate that this mode of financing dissipates credit risk better than the formal mode of financing. It is also resilient to volatility of interest rates and allows prepayments without any additional charges. Finally, we verify the assertions of Besley et al. (1994), and Hart and Moore (1998) that cooperative mortgages are pareto-superior to formal mortgages in special cases.


Does public housing occupancy increase unemployment?

Claire Dujardin & Florence Goffette-Nagot
Journal of Economic Geography, forthcoming

This article shows that living in public housing has no effect on the probability of being unemployed in France, once we account for the endogeneity of public housing. We estimate a simultaneous probit model of unemployment and public housing. On a first sample for Lyon, we instrument public housing with the gender composition of children. On a second national sample, the instrument is the city-level share of public housing. Both samples yield the same conclusion, which we justify by showing that a small amount of selection on unobservables is enough to eliminate the positive effect found in 'naive' estimates.


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