Working Papers
Did investors price regional housing bubbles? A tale of two markets (Job Market Paper)
Presented at the 2018 AREUEA-ASSA meeting, the 2017 Urban Day (DC)
The recent experience of a massive cycle in mortgage defaults was associated with a matching fluctuation in housing prices. Both events were very unequally distributed across local housing markets. This paper tests the hypothesis that spatial variation in the jumbo/conforming spread (the spread) indicates investor perception of spatial differences in credit risk. If investors priced spatial differences in credit risk, then spatial variation in the spread should predict spatial variation in future house price growth rate. The empirical tests, performed here for the first time, show that the spread predicts future house price growth rate in a manner that is both statistically and economically significant. Specifically, a one standard deviation increase in the spread is associated with 0.87%- 1.27% lower house price appreciation rate at the state level and 0.55%-1.30% lower appreciation rate at the MSA level. Overall, it appears that investors in the jumbo market were aware of spatial differences in the size of housing market bubbles and priced credit risk differences across housing markets, especially in large MSAs. Furthermore, failure of conforming rates to reflect these expectations likely accentuated the size of local bubbles.
A new estimate of elasticity of substitution between land and structure
Presented at the 2017 AREUEA International Conference, the 2016 NARSC meeting and the 2016 AREUEA National meeting
The elasticity of substitution of land for structure is an important parameter in standard urban model and has major implications for housing supply in cities. Past studies report a wide range of estimates from 0.27 to 1.52. This study differs from previous research in the following several ways: First, it considers buildings throughout a large city covering a wide range of FARs rather than just suburban low- density units. Second, land values are based on actual transactions instead of appraisals or imputations. Third, building FAR is based on what was actually constructed immediately after the land purchase. Finally, alternative estimates are constructed using assessment rather than market land values and using only low density housing.
Consistent with the engineering literature on building height and construction cost, elasticity of substi- tution is shown to be significantly below unity for higher FAR units. Specifically, while the elasticity of substitution for single family housing is 0.72, it is only 0.33 for newly built apartments containing both low and high density structures. Finally, estimates for high density development using assessed land values are close to unity. This suggests that assessors and appraisers might use the Cobb-Douglas Production function but the market does not.
Consistent with the engineering literature on building height and construction cost, elasticity of substi- tution is shown to be significantly below unity for higher FAR units. Specifically, while the elasticity of substitution for single family housing is 0.72, it is only 0.33 for newly built apartments containing both low and high density structures. Finally, estimates for high density development using assessed land values are close to unity. This suggests that assessors and appraisers might use the Cobb-Douglas Production function but the market does not.