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Dysfunction in the Real Estate Market

Paper Session

Sunday, Jan. 6, 2019 10:15 AM - 12:15 PM

Atlanta Marriott Marquis, Marquis Ballroom A
Hosted By: American Economic Association
  • Chair: Edward L. Glaeser, Harvard University

What Drove the 2003-2006 House Price Boom and Subsequent Collapse? Disentangling Competing Explanations

John M. Griffin
,
University of Texas-Austin
Samuel Kruger
,
University of Texas-Austin
Gonzalo Maturana
,
Emory University

Abstract

Ten years after the financial crisis, competing and often contradictory narratives have arisen around the central question of what can explain the massive rise and fall in house prices around the crisis. We provide a unified framework and use detailed cross-sectional data to examine four variants of the excess credit supply channel and three variants of the speculation channel that have been proposed in the literature. Although many proposed variables correlate well with house price patterns across regions, far fewer are consistently related to zip code level variation within regions both in the boom and the bust. The two variables that are selected by Bayesian model averaging as showing the strongest statistical and economic relation to house price changes, both in the boom and bust, are subprime lending and dubious origination practices. Surprisingly, none of the speculation measures including several possible extrapolative expectation proxies, explain zip code level house price growth variation within regions in both the boom and the bust. The effects of subprime lending and dubious origination are positively related to subsequent housing speculation and housing demand more generally. Inconsistent with lender expectations of future house price increases, credit supply is not correlated with house price growth in areas of elastic land supply; however, credit supply still predicts speculation growth, house transaction volume, and house price declines after the boom. Through both agency and non-agency loans, dubious lending practices seem to increase credit, and the effects of dubious lending are amplified in areas with likely income misreporting. Overall, our findings suggest that excess credit supply, particularly through subprime and dubious mortgage origination, stimulated housing demand and played a large role in the crisis.

Computer Vision and Real Estate: Do Looks Matter and Do Incentives Determine Looks?

Edward L. Glaeser
,
Harvard University
Michael Kincaid
,
Harvard University
Nikhil Naik
,
Harvard University

Abstract

How much does the appearance of a house, or its neighbors, impact its price? Do events that impact the incentives facing homeowners, like foreclosure, impact the maintenance and appearance of a home? Using computer-vision techniques, we find that a one standard deviation improvement in the appearance of a home in Boston is associated with a .16 log point increase in the home’s value, or about $55,000 at the sample mean. The additional predictive power created by images is modest relative to location and basic home variables, but external images do outperform variables collected by in-person home assessors. A home’s value increases by .7 log points, when its neighbor’s visually predicted value increases by one log point, and more visible neighbors have a larger price impact than less visible neighbors. Homes that went through foreclosure during the 2008-09 financial crisis experienced a .04 log point decline in their appearance-related value, relative to comparable homes, suggesting that foreclosures reduced the incentives to maintain the housing stock. We do not find more depreciation of appearance in rental properties, or more upgrading of appearance by owners before resale.

Gentrification and the Amenity Value of Crime Reductions: Evidence from Rent Deregulation

David Autor
,
Massachusetts Institute of Technology
Christopher Palmer
,
Massachusetts Institute of Technology
Parag Pathak
,
Massachusetts Institute of Technology

Abstract

Gentrification involves large-scale neighborhood change whereby new residents and improved amenities increase property values. In this paper, we study whether and how much public safety improvements are capitalized by the housing market after an exogenous shock to the gentrification process. We use variation induced by the sudden end of rent control in Cambridge, Massachusetts in 1995 to examine within-Cambridge variation in reported crime across neighborhoods with different rent-control levels, abstracting from the prevailing city-wide decline in criminal activity. Using detailed location-specific incident-level criminal activity data assembled from Cambridge Police Department archives for the years 1992 through 2005, we find robust evidence that rent decontrol caused overall crime to fall by 16 percent—approximately 1,200 reported crimes annually—with the majority of the effect accruing through reduced property crime. By applying external estimates of criminal victimization’s economic costs, we calculate that the crime reduction due to rent deregulation generated approximately $10 million (in 2008 dollars) of annual direct benefit to potential victims. Capitalizing this benefit into property values, this crime reduction accounts for 15 percent of the contemporaneous growth in the Cambridge residential property values that is attributable to rent decontrol. Our findings establish that reductions in crime are an important part of gentrification and generate substantial economic value. They also show that standard cost-of-crime estimates are within the bounds imposed by the aggregate price appreciation due to rent decontrol.

Collusion in Brokered Markets

John William Hatfield
,
University of Texas-Austin
Scott Duke Kominers
,
Harvard University
Richard Lowery
,
University of Texas-Austin

Abstract

The residential real estate agency market presents a puzzle for economic theory: agent entry is common and agents' costs to provide service are low, yet commissions on real estate transactions have remained constant and high for decades. We model the real estate agency market, and other brokered markets, as a repeated extensive form game; in our game, brokers first post prices for customers and then choose which agents on the other side of the market to facilitate transactions with. We show that monopoly prices can be sustained (for a fixed discount factor) regardless of the number of brokers through strategies that condition willingness to transact with each broker on that broker's initial posted price. Our results can thus rationalize why this market exhibits both fierce competition for customers and pricing high above marginal cost; moreover, our model can help explain why agents and platforms who have tried to reduce commissions have had trouble entering the market.
Discussant(s)
Benjamin Keys
,
University of Pennsylvania
Peter Coles
,
Airbnb
Eric Zwick
,
University of Chicago
Charles Gordon Nathanson
,
Northwestern University
JEL Classifications
  • R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location
  • D4 - Market Structure, Pricing, and Design