Price Appreciation Rates Research Articles

Subprime Mortgages and Housing Price Variations in the Philadelphia Metropolitan Area

Over the past decade, both the housing market and the subprime mortgage market in the United States experienced a rise and fall. To explore whether subprime lending has increased or decreased social inequality between subprime neighborhoods and nonsubprime neighborhoods, this article examines the relationship between subprime mortgages and housing price variations within the Philadelphia Metropolitan Statistical Area (MSA), using a global, ordinary least squares (OLS) method and a local, geographically weighted regression (GWR) method. The results show that neighborhoods obtaining disproportionate numbers of subprime mortgages enjoyed lower housing price appreciation rates than other neighborhoods during the housing boom era but suffered higher housing price depreciation rates during the housing bust era, after controlling for other variables. The results also show that the association between housing price variations and explanatory variables differs across geographic submarkets. The empirical evidence draws some policy implications, such as rethinking the homeownership policy through expanding subprime lending, as well as promoting place-based housing policymaking. Combining OLS and GWR, this article improves the understanding of how subprime lending exacerbated social inequality at the neighborhood level.

A General Pricing Model for a Mortgage Insurance Contract Considering the Effects of Multivariate Random Variables on Termination Probabilities and Loss Rate

This article describes the derivation of a general closed-form formula for determining a fair premium for both Federal Housing Administration (FHA) and private mortgage insurance (MI). Our model incorporates the regulations appearing in MI contracts, the changes in economic situations, the termination hazard rates (i.e., prepayment and default), and the loss rate given default. We then give an example to show how one uses our model to calculate an MI premium with FHA regulations by using real mortgage data. Our pricing formula can also be used to calculate the implied default hazard rates given the FHA's current MI. The comparison of this implied rate with the actual rate should help mortgage insurers decide whether the current MI premium should be adjusted. Further analysis shows how sensitive MI premiums are to changes in the model parameters, such as the volatility of the interest rate and the house price appreciation rate. Our pricing formula should make it easier for mortgage insurers to determine fair MI premiums and employ sophisticated risk-management procedures.

Rate of Return on Single Family Housing Investments in the U.S. 1970-2000

Investors owned 15 percent of all single family houses in the U.S. in the year 2000, with a value of fixed assets that dwarfed that of any single manufacturing industry, and approached that of the entire manufacturing sector. Owner occupied and investor owned houses are functionally identical and in the same market, but investors are subject to substantially higher taxes on the ownership of their houses. As change and adjustments occur to bring the single family housing market into equilibrium, the rate of price appreciation that leaves owner occupiers in equilibrium will have investors taking losses and exiting the market, without some compensating differential.The results reported here for the period 1970-2000 support the proposition that the rates of return received by owner occupiers and investors are the same in equilibrium and just equal to the risk adjusted opportunity return. Notwithstanding the adverse tax treatment, investor returns can equal owner occupier returns in the presence of two conditions. First, if investors are in a higher tax bracket than owner occupiers, this raises their tax subsidy since losses on housing investments offset other income, thereby lowering total tax obligations. This reduction in after tax costs is more pronounced when borrowed funds are involved. Second, investors are in a better position than owner occupiers to enter or exit the market as profit opportunities present themselves. If investors can raise the rate of house price appreciation they experience, relative to owner occupiers, by just a fraction of a point, this is enough to bring investors returns into alignment with those of owner occupiers and also with opportunity cost.

Sequential $\delta$-Optimal Consumption and Investment for Stochastic Volatility Markets with Unknown Parameters

We consider an optimal investment and consumption problem for a Black--Scholes financial market with stochastic volatility and unknown stock price appreciation rate. The volatility parameter is driven by an external economic factor modeled as a diffusion process of Ornstein--Uhlenbeck type with unknown drift. We use the dynamical programming approach and find an optimal financial strategy which depends on the drift parameter. To estimate the drift coefficient we observe the economic factor $Y$ in an interval $[0,T_0]$ for fixed $T_0>0$, and use sequential estimation. We show that the consumption and investment strategy calculated through this sequential procedure is $\delta$-optimal.

Information Frictions and Housing Market Dynamics

This paper examines the effects of seller uncertainty over their home value on the housing market. Using evidence from a new dataset on home listings and transactions, I first show that sellers do not have full information about current period demand conditions for their homes. I incorporate this type of uncertainty into a dynamic search model of the home selling problem with Bayesian learning. Simulations of the estimated model show that information frictions help explain short-run persistence in price appreciation rates and a positive (negative) correlation between price changes and sales volume (time on market).

Do Loan-to-Value and Debt-to-Income Limits Work? Evidence from Korea

With another real estate boom-bust cycle bringing woes to the financial sector and economic activity, a quest to design a better policy toolkit to deal with these booms and busts has begun. Macroprudential measures are often advocated as part of such a toolkit and recently have been adopted in a number of countries. Yet, we know very little about the impact of actively- imposed maximum limits on loan-to-value and debt-to-income ratios. This paper takes a step to fill this gap by analyzing the Korean experience with these tools. Using regional data from 2002 to 2010 and survey information on households from 2001 to 2009, we find that such limits are associated with a decline in house price appreciation rates and reduced transaction activity. Furthermore, there is evidence that the limits alter expectations, which play a key role in bubble dynamics. The association with mortgage loan originations and household leverage, however, appears to be weaker, perhaps reflecting the slow-changing nature of balance sheets.

House Price Appreciation Among Elderly Home Owners in Australia

This paper investigates whether the houses of elderly home owners appreciate at the same rate as the average house price appreciation rate in the market. For most elderly home owners, their well-being is strongly underpinned by their home ownership status, the value of their homes generally representing their most significant asset in old age. The viability of financial instruments such as reverse mortgages where elderly home owners effectively borrow against their housing equity also depend strongly on house prices appreciating enough to offset the outstanding loan balance at the end of the reverse mortgage tenure. This study employs the use of a panel dataset, the 2001-07 HILDA Survey, in order to examine the appreciation rates of the houses of elderly home owners compared to younger home owners. Ordinary least squares regression models are employed to estimate the impact of home owner's age on house price appreciation rates. The findings indicate that a home owner aged 65 or over suffers from a 5 percentage point discount in house price appreciation rate compared to younger home owners over the average sample observation period of 5.5 years. The annual appreciation rate is lowered by 0.13 (0.16) percentage points for each additional year a home owner is aged 65-74 (75 or over). The findings of this paper have important implications for the viability of housing asset-based instruments as retirement funding strategies in old age.

Monthly rent with variable deposit: A new form of rental contract in Korea

In this paper, we describe the structure of the monthly-rent-with-variable-deposit (MRVD) contract, a distinct type of rental contract in Korea. We demonstrate that the Chonsei contract is one variant of the MRVD contract. To explain the MRVD contract, we propose a leverage-effect-seeking hypothesis. Based on this hypothesis, we are able to elucidate a variety of rental market conditions in Korea. Our hypothesis is consistent with the simultaneous existence of several types of rental contracts and various combinations of monthly rent, as well as the up-front deposit in the MRVD contracts. We also focused on the deposit-to-monthly-rent conversion rate, a critical factor in the Korean rental housing market. Our hypothesis indicates that conversion rates vary across local markets depending on local market conditions, such as the expected house price appreciation rate. The results of our data analysis demonstrate that our hypothesis more adequately explains the observed trend in the conversion rate, as well as that in the MRVD contracts.

Default Risk of CMBS Loans: What Explains the Regional Variations?

We find substantial regional variations in CMBS loan default rates based on a 10-year history of nearly 38,000 CMBS loans. We seek to explain those variations with well documented risk factors such as negative equity, insolvency, property type, originator and state foreclosure law, as well as some newly introduced factors such as local unemployment rate, loan covenant (lock out) and natural disaster (Katrina). Many of the aforementioned factors are significant for CMBS loan default risk and they help explain part of the regional variations in CMBS loan default rate. We also find a significant negative relationship between local residential real estate appreciation and CMBS loan default – those regions with higher house price appreciation rates have lower default risk in CMBS loans. Moreover, differences in MSA-level residential real estate appreciation rate add explanatory power of the regional variations in CMBS loan risk, even though they do not fully explain the regional risk. Our findings have important implications for the CMBS investment community.

Consumption Responses to Permanent and Transitory Shocks to House Appreciation

We estimate the marginal propensity to consume (MPC) out of permanent and transitory shocks to house price appreciation. We consider two different models under which those shocks may affect consumption. In the first one, housing is a risky asset. In the second one, housing has a role as a consumption and as an investment good. In both, changes in the rate of house price appreciation may affect nonhousing consumption. Shocks to appreciation rates may happen when increases in future house prices are expected to differ from the current ones because heterogeneity, market failures or errors in expectations. We test the implications of those models empirically using the PSID's imputed total consumption from food consumption and self-reported house values, and base our identification strategy on two sources of variation in the appreciation rate. The first source depends on the fact that home prices are far more cyclical in areas where the supply of housing is relatively inelastic. The second source is households' perceptions about which parts of shocks to appreciation rates are permanent or transitory. We model households' self-reported rate of appreciation as an AR(1) process and use both the Hodrick-Prescott and the Kalman filter to separate households' perceptions about permanent and transitory shocks to appreciation. Our results show that (1) consumption responses to house wealth shocks vary greatly by area and depend upon the area-specific levels of temporal persistence and variance of those shocks (2) the overall MPC out of those shocks is 3.5% (3) the MPC out of permanent shocks is between 3.4% and 9.1% and (4) the MPC out of transitory shocks is between 0.5% and 3.3%.

Consumption Responses to Permanent and Transitory Shocks to House Appreciation

We estimate the marginal propensity to consume (MPC) out of permanent and transitory shocks to house price appreciation. We consider two different models under which those shocks may affect consumption. In the first one, housing is a risky asset. In the second one, housing has a role as a consumption and as an investment good. In both, changes in the rate of house price appreciation may affect nonhousing consumption. Shocks to appreciation rates may happen when increases in future house prices are expected to differ from the current ones because heterogeneity, market failures or errors in expectations. We test the implications of those models empirically using the PSID's imputed total consumption from food consumption and self-reported house values, and base our identification strategy on two sources of variation in the appreciation rate. The first source depends on the fact that home prices are far more cyclical in areas where the supply of housing is relatively inelastic. The second source is households' perceptions about which parts of shocks to appreciation rates are permanent or transitory. We model households' self-reported rate of appreciation as an AR(1) process and use both the Hodrick-Prescott and the Kalman filter to separate households' perceptions about permanent and transitory shocks to appreciation. Our results show that (1) consumption responses to house wealth shocks vary greatly by area and depend upon the area-specific levels of temporal persistence and variance of those shocks; (2) the overall MPC out of those shocks is 3.5%; (3) the MPC out of permanent shocks is between 3.4% and 9.1%; and (4) the MPC out of transitory shocks is between 0.5% and 3.3%.

House Price Appreciation in Old Age: Analysis and Issues for the Use of Reverse Mortgages as a Retirement Funding Strategy in Australia

This paper investigates whether the houses of Australian elderly home owners appreciate at below the market rate and examines the issues this may raise for the use of reverse mortgages as a retirement funding strategy in Australia. The viability of reverse mortgages where elderly home owners effectively borrow against their housing equity depends strongly on house prices appreciating enough to offset the outstanding loan balance at the end of the loan tenure. This paper’s findings indicate that after controlling for other influences, being aged 75 years or over lowers annual house price appreciation rate by almost 1.4 percentage points. Being aged 75 years or over also lowers home improvement expenditure by over AUD3,000 per year and this is found to be attributable to a decline in income during old age. The majority of elderly home owners want to protect at least half of their housing equity when considering participating in reverse mortgage programs, but given below-average house price appreciation rates during old age, the propensity of a 50% equity protection declines sharply with age. In particular, single females aged 75 years or over are least able to protect at least half of their housing equity, with only around 15% able to do so by the end of a reverse mortgage loan tenure. The paper also finds that, worryingly, elderly home owners with characteristics associated with slower house price appreciation rates are over-represented among reverse mortgage borrowers in Australia, namely, those aged 75 years or over, single, living in apartments or residing in states with relatively slow house price growth.

Determinants of housing price volatility in Canada: a dynamic analysis

This article tries to identify the determinants of housing price volatility and to examine the dynamic effects of these determinants on volatility using quarterly data for Canada. The Generalized Autoregressive Conditional Heteroskedastic (GARCH) and the Vector Autoregressive (VAR) models have been employed to analyse possible time variation of the housing price volatility and the interactions between the volatility and the key macroeconomic variables. We find the evidence of time varying housing price volatility for Canada. Our VAR, Granger causality and variance decomposition (VDC) analyses demonstrate that housing price volatility is affected significantly by gross domestic product (GDP) growth rate, housing price appreciation rate and inflation. On the other hand, volatility affects GDP growth rate, housing price appreciation and volatility itself. The impulse response analysis reveals the asymmetric of the positive and negative shocks. The findings of this article have important implications, particularly for those seeking to develop derivatives for housing market prices.

Valuation of Mortgage-Backed Securities: A Portfolio Credit Derivatives Approach

Non-agency mortgage-backed securities (MBS) are typically priced and traded on discounted cashflow basis where a cashflow projection is made under a prepayment and default scenario and discounted with a discount margin (DM) that supposedly measures credit risk. Whilest simple and intuitive to traditional buy-and-hold investor base, it quickly became clear that DM was not effective for pricing and risk management, when mortgage credit rapidly grew out of usually mild credit environment and more sophisticated participants entered into the market. In particular, synthetic players' push for standardization of CDS on ABS and index products (ABX and CMBX) started to demand pricing consistency across cash and synthetics. In this paper we advocate application of portfolio credit derivative no arbitrage pricing framework to mortgage securitization products and their derivatives. To demonstrate we focus on the first toxic out of the Pandora's box into the financial system -- subprime MBS. We develop an amortizing mortgage loan model with competing arrival of random prepayment and default events following reduced form modeling of corporate default. Loan prepayment correlation, default correlation, and cross correlation can be built drawing into vast literature of corporate default correlation modeling. As both prepayment and default depend on house price appreciation and interest rate, we introduce a prepayment and default factor copula (Gaussian) to statically model these two factors. Analysis of recent vintage subprime deal structure reveals a near sequential pay waterfall which allows semi-analytical pricing of MBS. Calibration to ABX.HE benchmark is satisfactory and pricing of bespoke ABS off the index not only offers fair value data points when there is no market but also an innovative way to assess relative values. ABS CDO and TABX can be consistently priced with underlying ABS and the model naturally extends to CMBS/CMBX/CRE CDO and CLO/LCDX.

Modeling of Mortgage Defaults

Mortgage defaults are involuntary prepayments caused by the liquidation of loans following delinquency and foreclosure. Default projections are required for projecting loss-adjusted cash flows for mortgage pools, and they are key to accurately quantifying mortgage credit risk. This article describes a model that projects default rates as a function of mortgage and borrower characteristics and economic variables such as home price appreciation, unemployment and interest rates. We use the model to examine defaults and losses on subprime and AltA mortgages, focusing in particular on recent vintage subprime loans and on the ABX indexes. <b>TOPICS:</b>MBS and residential mortgage loans, credit risk management, factor-based models

Unlocking Housing Equity Through Reverse Mortgages: The Case of Elderly Homeowners in Australia

Abstract This paper investigates the extent to which reverse mortgages can improve the economic well-being of elderly Australian homeowners. Reverse mortgages are designed to enable elderly homeowners to unlock illiquid wealth tied up in their housing equity to generate income. The elderly borrow against the value of their homes. However, no repayments are made until the house is sold or the elderly borrower dies. The findings from this paper indicate that the scope for reverse mortgages to improve economic well-being is considerable in Australia. Elderly homeowners who are likely to receive the largest gains from reverse mortgages are very elderly, single, female and have significant housing equity. However, in areas with slow house price appreciation rates elderly homeowners who enter into reverse mortgages face the risk of being left with little housing equity to draw on when needed or to bequeath to their beneficiaries when they pass away.

The Determinants of Home Price Appreciation Among Community Reinvestment Homeowners

Homeownership is considered an effective wealth creation mechanism for low-income households. This study examines the appreciation of homes purchased with community reinvestment loans in a national pilot in the USA called the Community Advantage Program (CAP). Homes purchased between 1998 and 2002 are found to have appreciated at a median annual rate of 5.4% between the time of purchase and spring 2003. This is less than the national house price appreciation index of 7.0% (covering 1998–2003) but higher than other types of investments such as the Dow Jones Index (2.78% annual growth rate) and the average rate on a 6-month CD (4.34%) over the same time period. The median increase in net housing wealth of the Community Advantage homeowners is $17 492. Returns have been particularly impressive for the lowest-income borrowers. Borrowers with less than $20 000 in annual household income at the time of purchase had a median down-payment of $1790 and have experienced a median equity increase of $24 724. Price and equity appreciation rates for African Americans are solid, but are about 10% lower than for whites.

Measuring the impacts of community development initiatives: a new application of the adjusted interrupted time-series method.

The authors contribute to the development of empirical methods for measuring the impacts of place-based local development strategies by introducing the adjusted interrupted time-series (AITS) approach. It estimates a more precise counterfactual scenario, thus offering a stronger basis for drawing causal inferences about impacts. The authors applied the AITS approach to three community development initiatives using single-family home prices as the outcome indicator and found that it could measure impacts on both the base level of prices and the rate of price appreciation. The authors also found a situation in which the method appears unreliable, however. The AITS approach benefits from more recurrent data on outcomes during the pre-and post-intervention periods, with an intertemporal pattern that avoids great volatility. The AITS approach to measuring effects of community development initiatives holds strong promise, with caveats.

Alternative Methods of Increasing the Precision of Weighted Repeat Sales House Prices Indices

Weighted repeat sales house price indices have become one of the primary indicators used to identify housing market conditions and to estimate the amount of equity homeowners have gained through house price appreciation. The primary reason for the acceptance of this methodology is that it derives a location specific (typically, census division, state or metropolitan area) average change in house prices from repeated observations of individual house prices. It is this repeat attribute that allows repeat sales price indices to claim that it is a preferable index which does a better job of holding quality constant. The amount of time between the two observed prices for a single property is determined by when the home transacts. Some homes transact twice in a period of months and others do not transact for decades. It is likely that individual house price appreciation rates vary from the mean appreciation rate, as estimated by the index, in a systematic fashion. In general, the longer the time between transactions the more variance there is in individual house price appreciation. This paper extends this concept to include new dimensions. For instance, houses that appreciate faster than the mean, as estimated by the index for that location, may experience a different variation structure than homes that appreciate slower. This process can be viewed as an asymmetric treatment of the variance of house price appreciation around the estimated index. In addition, the variance of expensive and affordable homes may also be different and time varying. This paper finds evidence that adding the dimensions of price tiers and asymmetry to the variance estimate has merit and does affect the estimated index as well as homeowner equity estimates. Homeowner equity estimates are especially sensitive to these added dimensions because they depend on both the revised index and the estimated variances, which are specific to each dimension considered—time between transaction, asymmetry, and price tier.

Long-Term Appreciation of Owner-Occupied Single-Family House Prices in Milwaukee Neighborhoods

Annual price indices of owner-occupied single-family houses are estimated for 111 neighborhoods in Milwaukee, Wisconsin, for the period of 1971-1993 using hedonic price methods controlling for quality differences across housing units. The rates of price appreciation vary significantly from neighborhood to neighborhood. During the 22-year study period, nominal house prices in some neighborhoods increased more than 500%, whereas those in others decreased. In general, the neighborhoods close to each other exhibit similar price movements. In some cases, however, there are sharp differences between the neighborhoods when strong boundaries, such as a river or an expressway, exist between them even though the physical distance between them is small. Poor neighborhoods generally have experienced low appreciation rates, although the racial composition and the crime rate in the neighborhood seem to contribute the differential as well.