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Residential Real Estate 1

Paper Session

Friday, Jan. 3, 2025 2:30 PM - 4:30 PM (PST)

San Francisco Marriott Marquis, Nob Hill B
Hosted By: American Real Estate and Urban Economics Association
  • Chair: Christina Ling Li, Peking University

Limits of Arbitrage and Term Structure of Idiosyncratic Risk in the Housing Market

Quan Gan
,
University of Sydney
Wayne Xinwei Wan
,
Monash University
Ke Xu
,
University of Hong Kong

Abstract

Government regulations on housing flippers target their high capital gains but ignore their risk-sharing
function: rational arbitrageurs reduce systematic risk borne by other participants while undertaking
high idiosyncratic risk themselves. Regulations that tighten the limits of arbitrage in housing markets
can adversely affect market efficiency by blocking this risk-sharing function. Using the comprehensive
housing transaction records in Hong Kong from 1993 to 2021, we find although flippers obtain higher
annual capital gain returns than long-term buyers by 8.76 percentage points, they undertake
substantially higher idiosyncratic risk due to a unique downward term structure of idiosyncratic risk
in real estate markets. Only experienced flippers, who have at least two prior trading experiences and
constitute less than 20% of the flippers, outperform long-term buyers in terms of risk-adjusted returns.
Following the enactment of an anti-speculation policy that decreases the share of flippers by 13.7
percentage points in one year, the systematic risk of the entire housing market increases by 22.3%.

Mortgage Performance and Home Sales for Damaged Homes Following Hurricane Harvey

Nuno Mota
,
Fannie Mae
Mark Palim
,
Fannie Mae

Abstract

We analyze loan performance and property transactions following Hurricane Harvey using a novel dataset with property-specific flood insurance and claim information. Using insurance claims to proxy for damages we find that both short-term delinquency and forbearance take-up are positively associated with damages. Loan modification is positively correlated with damages of up to 50% of property value and negatively correlated thereafter, suggesting that, for severely damaged homes with flood insurance, loan modifications are not an attractive remedy for delinquency concerns. By contrast, the likelihood of loan prepayment is strongly associated with large damage levels. This indicates such homeowners are likely selling their home unrepaired, making up for any shortfall between loan balance and sale price with insurance proceeds. Property transactions analysis reveals that damaged homes are less likely to sell immediately following Harvey. If they do sell, they do so at a steep price discount, sell faster and are in worse condition when sold. A pattern consistent with the homeowner behavior described above and with investors purchasing damaged homes looking to “fix and flip” the properties. We find the negative impact of large damages on sale price lingers, though at a subdued discount, at least up to 2 years out.

Impact of Institutional Investors on Housing Markets

Caitlin Gorback
,
University of Texas-Austin
Franklin Qian
,
University of North Carolina-Chapel Hill
Zipei Zhu
,
University of North Carolina-Chapel Hill

Abstract

Since the Great Recession, the rise of single-family rental companies has changed the investor ownership landscape in the U.S. Using housing transaction data, we document the rise of Long Term Rental (LTR) companies, comprising of rent-to-own, single family rental, and real estate private equity firms, by constructing a panel of national single-family housing portfolios. We show that LTR growth outstripped all other investor types and that these companies geographically concentrate their holdings, expanding their local market shares over time. We construct a novel instrument predicting LTR entry, leveraging differential revealed preferences in product characteristics across landlord types, interacting with a proxy for falling property management costs over time. We use this instrument for LTR market entry to estimate the causal impact of LTR market share on local house prices. We find that a 1-standard deviation above the mean increase in LTR share growth leads to an annual additional house price growth of 2.11pp. Finally, we discuss how the reallocation of homeownership across small and large landlords, as well as owner-occupants and investors, contribute to these price increases.

Institutional Investors in the Market for Single-Family Housing: Where Did They Come From, Where Did They Go?

Sebastian Hanson
,
Stanford University

Abstract

Since 2012 the U.S. market for single-family homes has experienced a large and unprecedented rise in rental purchases by institutional investors or ``Wall Street Landlords''. My paper causally attributes the entry of these financially unconstrained investors to an increase in expected excess returns that is driven by (i) declining long-term interest rates and (ii) tighter household funding constraints. After entry of these investors into a local market, house prices and rents grow 2pp and 1.2pp faster per year. The majority of faster house price growth can be accounted for by market timing and would likely also have occurred in the absence of institutional investors. Faster rental growth cannot be accounted for by market timing, suggesting that institutional investors use their size to extract markups in rental markets. I replicate this evidence in a stylized model of the residential housing market in which funding-constrained households bid against unconstrained investors.

Discussant(s)
Christina Ling Li
,
Peking University
Chongyu Wang
,
Florida State University
Tingyu Zhou
,
Florida State University
Franco Zecchetto
,
Mexico Autonomous Institute of Technology
JEL Classifications
  • R0 - General