Local House Prices Research Articles

International Real Estate Review

This paper introduces Home Appreciation Participation Notes (HAPNs), an innovative new housing finance tool. Housing is a commodity providing two distinct utilities: shelter and investment. Traditionally, buyers have had to purchase both elements in tandom. HAPNs allow buyers to purchase these elements individually. Thus, buyers can focus on purchasing housing units that best fit their shelter needs, investing in housing appreciation to whatever extent is appropriate for the needs of their investment portfolio. HAPNs are different from previous financing tools in three key ways: there is no payment burden until ownership of the home is transferred, the risk of housing price declines is shifted to investors, and the final payoff is indexed to the appreciation rates of local housing prices. With these three features, HAPNs considerably improve the affordability of homeownership while reducing the risk of default and avoiding the moral hazard associated with shared appreciation instruments.

On Local Housing Supply Elasticity

Housing markets have been established as fundamental to understanding business cycles, financial market stability, labor mobility, household wealth, individual portfolio allocation, and urban dynamics. What determines local housing supply elasticities and prices? In this paper I give empirical content to the concept of land availability by processing satellite-generated data on elevation and presence of water bodies to precisely estimate the amount of developable land in each metro area. I demonstrate that development is effectively curtailed by the presence of slopes above 15% and that most areas that are widely regarded as supply-inelastic are, in fact, severely land-constrained by their topography. Furthermore, the extent of topographical constraints correlates positively and strongly with regulatory barriers to development. Immigration, high taxes, politics, and communitarian social capital are also predictive of more restrictive residential land regulations. I estimate a system of equations where housing prices, construction, and regulations are all determined endogenously. Housing supply elasticities can be well-characterized as functions of both physical and regulatory constraints, which in turn are endogenous to prices and past growth. The results provide operational estimates of local supply elasticities in all major US metropolitan areas.

Housing markets and the economy: the assessment

Housing markets have multiple interactions with the rest of the economy and these are surveyed in this paper. The drivers of house prices include income, the housing stock, demography, credit availability, interest rates, and lagged appreciation, the latter a potential mechanism for overshooting. There is rather less agreement on the determinants of new construction, though planning constraints are widely seen as a major issue and one of the causes of the UK housing affordability problem. The paper argues that housing collateral and downpayment constraints are the key to understanding the role of house-price variations in explaining medium-term consumption fluctuations. Institutional variations between countries and over time account for major differences in linkages between house prices and economic activity. This illuminates debates about how monetary and other policy should react to house-price variations. The paper also discusses the role of housing markets in explaining regional migration and location decisions, intergenerational inequality, and restricting access of the less affluent to public goods, such as good schools, which are capitalized in local house prices.

Does Hazardous Waste Matter? Evidence from the Housing Market and the Superfund Program

Approximately $30 billion (2000$) has been spent on Superfund clean-ups of hazardous waste sites, and remediation efforts are incomplete at roughly half of the 1,500 Superfund sites. This study estimates the effect of Superfund clean-ups on local housing price appreciation. We compare housing price growth in the areas surrounding the first 400 hazardous waste sites to be cleaned up through the Superfund program to the areas surrounding the 290 sites that narrowly missed qualifying for these clean-ups. We cannot reject that the clean-ups had no effect on local housing price growth, nearly two decades after these sites became eligible for them. This finding is robust to a series of specification checks, including the application of a quasi-experimental regression discontinuity design based on knowledge of the selection rule. Overall, the preferred estimates suggest that the benefits of Superfund clean-ups as measured through the housing market are substantially lower than the $43 million mean cost of Superfund clean-ups.

Subprime Mortgage Delinquency Rates

We evaluate the importance of three different channels for explaining the recent performance of subprime mortgages. First, the riskiness of the subprime borrowing pool may have increased. Second, pockets of regional economic weakness may have helped push a larger proportion of subprime borrowers into delinquency. Third, for a variety of reasons, the recent history of local house price appreciation and the degree of house price deceleration may have affected delinquency rates on subprime mortgages. While we find a role for all three candidate explanations, patterns in recent house price appreciation are far and away the best single predictor of delinquency levels and changes in delinquencies. Importantly, after controlling for the current level of house price appreciation, measures of house price deceleration remain significant predictors of changes in subprime delinquencies. The results point to a possible role for changes in house price expectations for explaining changes in delinquencies. * The views presented are those of the authors and not necessarily those of the Federal Reserve System. The authors would like to thank Chris Foote, and participants at the 2007 Federal Reserve System Regional Conference, and Abigail Urtz and Annie Zhang for excellent research assistance.

Local housing price index analysis in wind-disaster-prone areas

This study examines the effect of severe wind events on the mean and variance of housing price indices of six metropolitan statistical areas (MSA) that are vulnerable to hurricanes and/or tornadoes. The research focuses on three areas that experienced significant tornado activity (Fort Worth-Arlington, Nashville, and Oklahoma City) and three hurricane-prone areas (Corpus Christi, Miami, and Wilmington, NC). An econometric time series model that captures the housing market responses to severe windstorms is utilized. The model estimates changes in the local housing price index (HPI) as a function of several control variables as well as dichotomous variables that correspond to the tornadoes and hurricanes. As expected, the statistical findings indicate an immediate but short-lived decline in housing prices following a tornado or hurricane. Somewhat surprising is the result that the impact on the housing market is remarkably consistent whether the wind event was a hurricane or a tornado. Hurricanes and tornadoes are vastly different in terms of the point probabilities of a hit, the scope of the affected area and the lead time that supports last minute preparation to mitigate damage. It appears that the market response to destruction of real property does not distinguish between the types of wind event that produced the damage to the region. Results suggest that windstorms result in an immediate one-half to two percent reduction in total MSA housing value. This corresponds to a range of $34 million to $580 million in lost housing value. Estimates indicate some differences in how long market values continue to decline in the periods following the wind event; however, most of the decline occurs within four quarters after the windstorm. These differences can be attributed to the particular time series characteristics of the specific housing markets and their respective housing price indices. The market serves the purpose of integrating and normalizing the losses. In so doing the market provides a metric— a method for calibrating and comparing structural damage caused by different phenomenon.

Local housing prices and mortgage refinancing in US cities

PurposeThe purpose of this paper is to provide additional evidence that housing prices significantly impact aggregate refinancing and thus directly influence mortgage termination.Design/methodology/approachRegression analysis is applied to examine refinancing activity in US cities.FindingsThe evidence shows that positive appreciation in housing prices provides the borrower with positive incentives to refinance in response to the associated increased borrowing capacity when mortgage rates have declined. On the other hand, depreciation in housing prices may depress refinancing.Research limitations/implicationsHousing price movements, not only collateral constraints on refinancing but also the disincentive to engage in cash‐out refinancing caused by depreciation as well as the incentive for cash‐out refinancing brought by appreciation, should be included in modeling total termination risks of mortgage‐backed securities.Originality/valueIn contrast to previous studies, this paper provides empirical support for both the incentive and the disincentive to engage in cash‐out refinancing produced by housing price changes, in addition to support for the traditional collateral constraint effect of housing prices on refinancing.

Does Hazardous Waste Matter? Evidence from the Housing Market and the Superfund Program*

This paper uses the housing market to develop estimates of the local welfare impacts of Superfund-sponsored cleanups of hazardous waste sites. We show that if consumers value the cleanups, then the hedonic model predicts that they will lead to increases in local housing prices and new home construction, as well as the migration of individuals that place a high value on environmental quality to the areas near the improved sites. We compare housing market outcomes in the areas surrounding the first 400 hazardous waste sites chosen for Superfund cleanups to the areas surrounding the 290 sites that narrowly missed qualifying for these cleanups. We find that Superfund cleanups are associated with economically small and statistically insignificant changes in residential property values, property rental rates, housing supply, total population, and types of individuals living near the sites. These findings are robust to a series of specification checks, including the application of a regression discontinuity design based on knowledge of the selection rule. Overall, the preferred estimates suggest that the local benefits of Superfund cleanups are small and appear to be substantially lower than the $43 million mean cost of Superfund cleanups.

Taking Compensation Private

In light of the expansive interpretation of the public use requirement, the payment of just compensation remains the only meaningful limit on the government's eminent domain power and, correspondingly, the only safeguard of private property owners' rights against abusive takings. Yet, the current compensation regime is suboptimal. While both efficiency and fairness require paying full compensation for seizures by eminent domain, current law limits the compensation to market value. Despite the virtual consensus about the inadequacy of market compensation, courts adhere to it for a purely practical reason: there is no way to measure the true subjective value of property to its owner. Subjective value is neither observable nor verifiable to third parties and courts cannot rely upon owners' reports of the value they attach to their properties. To date, the challenge of screening truthful from exaggerated evaluation has proven insurmountable.This Article solves the undercompensation conundrum. It offers a novel self-assessment mechanism that enables the payment of full compensation at subjective value when private property is taken by eminent domain. Under the proposed mechanism, property owners would get to set the price of the property designated for condemnation. The government could then either take the property at the designated price, or abstain, leaving the property subject to two new proposed restrictions. First, for the life of the owner, the property could not be sold for less than the self-assessed price, adjusted on the basis of the local housing price index. Second, the self-assessed price - discounted to take account of the peculiarities of property tax assessments - would become the new benchmark for the owner's property tax liability. The Article shows that under most conditions, these restrictions will induce honest reporting by owners, while reducing the transaction costs created by the compensation process. The result is a dramatically more efficient law of eminent domain that is also far more respectful of private property rights.

Local house price developments and housing supply

PurposeIn this paper, we identify the relationship between (local) housing supply and (local) house price developments, especially in The Netherlands.Design/methodology/approachWe measure the influence of new building on house prices by comparing areas designated for concentrated new building (main Dutch cities) with areas where no large housing projects are developed. On the basis of classical economic theory, if the housing market is functioning as it should, then supply will soon respond to a shock in demand and restore stability in house prices.FindingsFor the main Dutch cities, we found that an increase in supply triggers a fall in prices. In other areas the correlation coefficients are more or less zero, which can lead us to conclude that the expansion of the housing stock is market‐compliant.Research limitations/implicationsThe housing market is not functioning, as it should: new supplies depend on the complex decisions of the suppliers, thus making it difficult to express statistically the causality between the house price developments and the new supplies.Practical implicationsMost studies suggest that macro data are unable to measure the true dependency between the house prices and the new building and claim at the same time that micro data sets are incomplete. Also our research was hampered by a shortage of usable data.Originality/valueNew building can push up the value of the surrounding housing because it is associated with a qualitatively better housing stock. We conclude that in regions where new building has been concentrated in designated areas, the relationship between housing production and price development is inverse.

A Semiparametric Method for Estimating Local House Price Indices

Spatial autoregressive hedonic models utilize house prices lagged in space and time to produce local house price indices, for example, the spatial and temporal autoregressive (STAR) model might be used this way. This paper complements these models with a semiparametric approach, the Local Regression Model (LRM). The greater flexibility of the LRM may allow it to identify space–time asymmetries missed by other models. The LRM is fitted to 49,511 sales from 1972Q1 to 1991Q2 in Fairfax County, Virginia. The local price indices display plausible and significant variations over space and time. The LRM price indices in selected neighborhoods are shown to differ significantly from those in some other neighborhoods. A new method for estimating standard errors addresses an overlooked problem common to all local price indices: how to evaluate the amount of noise in the estimates. Out‐of‐sample prediction errors demonstrate that LRM adds significant information to the hedonic model.

A Semi Parametric Method for Estimating Local House Price Indices

Spatial autoregressive hedonic models utilize house prices lagged in space and time to produce local house price indices: e.g., the STAR model might be used this way. This paper complements these models with a semiparametric approach, the Local Regression Model (LRM) designed to use large databases to produce neighborhood price indices and confidence intervals at each point on a spatial. The greater flexibility of the LRM may allow it to identify space-time asymmetries missed by other models. The LRM is fitted to 49,511 sales from 1972Q1 - 1991Q2 in Fairfax County, Virginia. The local price indices display plausible and significant variations over space and time. On average, LRM indices are the same as a standard hedonic price index for the entire county. The LRM price indices in selected neighborhoods are shown to differ significantly from those in some other neighborhoods. A new method for estimating standard errors addresses an overlooked problem common to all local price indices: How to evaluate the amount of noise in the estimates. Out-of-sample prediction errors demonstrate that LRM adds significant information to the hedonic model. Moran's I-statistics suggest that future research could usefully add a STAR or spatial autocorrelation model to the LRM.

Towards a System of Local House Price Indices

This paper argues that understanding of the performance and price structure of urban housing markets in the UK would be enhanced by limited investment in comprehensive systems for collecting data on housing transactions. These data would allow the construction of reliable and accurate indices at different levels of spatial aggregation. The empirical part of the paper uses data from the Western Australian Valuer General's Office to illustrate the data requirements and practical considerations in the construction of indices. The dataset provides comprehensive information on property attributes and the sales history of individual transactions and allows a comparison of the accuracy of a number of variants on the hedonic and repeat-sales index methods. The evidence suggests repeat-sales indices can be constructed on less detailed data with little loss of accuracy. The paper concludes by suggesting that repeat-sales methods, although largely ignored in the UK to date, lend themselves well to the development of a system of local price indices using the information recorded by the Land Registry.

The Effects of Competition Between Schools on Educational Outcomes: A Review for the United States

This article systematically reviews U.S. evidence from cross-sectional research on educational outcomes when schools must compete with each other. Competition typically is measured by using either the Herfindahl Index or the enrollment rate at an alternative school choice. Outcomes are academic test scores, graduation/attainment, expenditures/efficiency, teacher quality, students’ post-school wages, and local housing prices. The sampling strategy identified more than 41 relevant empirical studies. A sizable majority report beneficial effects of competition, and many report statistically significant correlations. For each study, the effect size of an increase of competition by one standard deviation is reported. The positive gains from competition are modest in scope with respect to realistic changes in levels of competition. The review also notes several methodological challenges and recommends caution in reasoning from point estimates to public policy.

Housing price responses to newspaper publicity of hazardous waste sites

This paper uses housing market data to examine the relationship between newspaper coverage of local hazardous waste sites and housing prices. We explore a range of measures of newspaper publicity, including the number of Superfund-related articles, the number of such articles that focus on the risk levels at the sites, and the number of such articles that appear on page one or section A. We restrict our sample to those houses sold more than once in order to eliminate confounding timE−invariant determinants of housing price. Our findings indicate a price increase of approximately US$ 100–200 per article, which could suggest that the publicity either led residents to lower their perceptions of risk or led them to increase their expectations of a clean-up (or both).

Estimating local repeat sales house price indices for British cities

This paper argues that the methods of constructing house price indices for UK markets lag behind those employed in Europe, Australasia and North America. This is particularly evident in terms of the range and level of technical sophistication of the index construction methodologies. Importantly, the paper argues that the absence of reliable house price indicators undermines the decision‐making ability of policy makers and investors operating in urban housing markets. The paper suggests that this can, in part, be remedied by the construction of a system of local house price indices for British cities. The empirical research presents the first UK application of the repeat sales method to UK data. Indices are constructed for four cities and a range of diagnostic tests are used to establish the reliability and accuracy of the indices as a means of monitoring house price change. The research concludes by suggesting that the methods used here should be tested further on data from major metropolitan regions in England and Wales.

House Prices and Local Taxes in the UK

AbstractIn this paper, estimates of the effects of local domestic property taxes (rates) on local house prices are presented, and the effect of local taxes on owner‐occupied dwelling prices is calculated for a number of English cities for the period up to 1990. The methods used enable estimation to be made of the effect of the introduction, during 1990, of the Community Charge or poll tax in England, when the local tax base was moved from housing consumption onto individual residency. It is estimated that the reform could have increased house prices by around 15 per cent and contributed substantially to house price inflation.

The Influence of Economic Variables on Local House Price Dynamics

This paper is motivated by recent studies of the effect of economic changes (e.g., in population, employment, and income) on house prices (see Mankiw and Weil, Regional Science and Urban Economics, 19, 235–258, 1989; Hendershott and Peach draft paper presented at the AREUEA midyear meeting in Washington, DC, 1990; DiPasquale and Wheaton draft paper presented at the AREUEA midyear meeting in Washington, DC, 1990). The purpose of this study is to explore the relationship between methods used to measure house price indices and economic determinants of house prices at the local level. Non-nested tests proposed by Davidson and MacKinnon (Econometrica, 49(3), 781-793, 1981) and by Green (Economic Letters, 31, 349-354, 1989) are extended to deal with contemporaneous correlation among disturbance terms. Also, a new χ2 test is developed to evaluate differences in the functional relationships between alternative house price indices and economic variables. Twomethods for measuring house price changes are used: the repeat sales method and the assessed value (AV) method. Data for Hartford, Connecticut, indicate that the correlation between the annual rates of change in these two price indices is high (about 0.8). But the percentage changes in the two price indices differ substantially over periods of 2 to 10 quarters. Nevertheless, the two price indices are related to economic variables, such as changes in local employment and unemployment, in a similar way. The results indicate a strong role for expected inflation and unemployment, both of which reduce house price changes. Furthermore, these variables have considerable forecasting ability, contrary to the efficient market hypothesis. Model results could be improved by combining AV and repeat price indices with about twice as much weight on the AV method.

Valuing the environmental impacts of opencast coal mining in the UK: The case of the Trent Valley in North Staffordshire

The environmental costs which often accompany opencast coal mining are generally excluded from financial appraisals of opencast projects. We examine an opencast proposal for the North Staffordshire coalfield of the UK. A survey of local estate agents suggests that, as measured by the impact upon local house prices, the monetary environmental costs of the project could be sufficient to reduce substantially its economic viability. Moreover, opencast coal in North Staffordshire is almost certainly more costly to produce than equivalent deep mined coal. If the UK government wishes to support the market for domestic deep mined coal, it could do so at zero effective cost simply by restricting opencast production.

Local House Price Indexes: 1982–1991

We begin with a description of three house price panel data sets for the period 1982 to 1991. Next, we estimate a model that assumes the three sources are derived from an underlying unobserved price series, and we construct composite indexes that report house prices for 135 locations. These series can be used either as explanatory variables in studies of household formation, housing demand, and migration or to test models of the determinants of spatial and intertemporal variations in house prices. Finally, we construct regional series (based, alternatively, on census and Salomon Brothers regions) and two national aggregates and describe their movements. Our series are compared to other local, regional, and national series.