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Information, Spillovers, and Housing

Paper Session

Sunday, Jan. 8, 2017 3:15 PM – 5:15 PM

Sheraton Grand Chicago, Ontario
Hosted By: American Real Estate and Urban Economics Association
  • Chair: Richard Green, University of Southern California

Improved Information Shock and Price Dispersion: A Natural Experiment in the Housing Market

Danny Ben-Shahar
,
Tel Aviv University
Roni Golan
,
Technion-Israel Institute of Technology

Abstract

This research employs data from a natural experiment to assess the effect of improved
price information shock on subsequent real estate transaction price dispersion. While transaction
data in the Israeli real estate market had never been open to the public, in 2010 an Israeli court
ordered the Israel Tax Authority to post all real estate transaction data on its website. We employ
all housing transactions in the period prior and subsequent to this event to assess its effect on
housing price dispersion. Results provide strong evidence of improved market efficiency as
indicated by a significant decrease in the dispersion of quality-adjusted prices. We further find
evidence that the information shock effect on price dispersion varies with household
characteristics in the market. Our findings support the market transparency argument for
promoting economic efficiency and equity.

Housing Market Spillovers in a System of Cities

Thom Malone
,
University of Southern California

Abstract

It is well-documented that housing leads the business cycle at the national level. Dating back as far as the great depression, nearly every recession or boom has been preceded by a respective drop or rise in residential investment (Green, 1997; Leamer, 2007). However, neither the business cycle nor the housing cycle is truly national in their nature. Historically, the severity and timing of both vary greatly across cities. This has been acknowledged in the literature (Ghent and Owyang, 2010), but the possibility that different cities housing markets and economies could be interacting, and spilling over amongst one another has not yet been considered.

I use a Global Vector Autoregression to model building permits and employment at the metro level for 78 cities in the U.S from 1990-2015, then link these models together in a system of cities. The model reveals several results of interest. First, the status of residential investment as a leading indicator for the business cycle is questionable at the metro level and is found to be true in only 47 of 78 cities. Second, shocks to housing in cities do spill over into other cities. In fact, in many cases, the responses to shocks are larger in other cities than in those where the shocks originated. Thus, the national relationship between housing and the economy appears to be created by a collection of cities housing markets spilling over into other cities. Third, the largest spillovers are often not found in adjacent cities to those where the shock occurred. This indicates that factors other than physical distance, such as trade and migration, are the channels shocks are transmitted through.

Overall, the results suggest a role for place-based policy, where stabilizing new housing development in particular cities could result in some stabilization of the national business cycle.

Houses as Hedges Against Deflation

Peter Chinloy
,
American University
Man Cho
,
Korea Development Institute
Inho Song
,
Korea Development Institute

Abstract

Abstract Houses hedge against deflation. The fundamental rent-price yield rises, offering room to cover rising real debt and expected deflation. Falling interest rates signal further expected deflation, increasing the rent-price yield avoiding ownership. Rising real rents and falling rates create cash flows. Over 1980-2014 houses in Japan have a real yield premium at least 1.3% higher than in Germany, the U.S., U.K or Korea. Renters bear 57% of interest rate shocks versus no more than 17% elsewhere. Instead of debt deflation and panic selling, per capita output of houses is more than three times that elsewhere.

Household Overconfidence in the United Kingdom Housing Market

Soosung Hwang
,
Sungkyunkwan University
Youngha Cho
,
Oxford Brookes University
Jinho Shin
,
Sungkyunkwan University

Abstract

Using the Epstein-Zin utility in a consumption-based pricing model, we identify three explanatory variables required for the prediction of house prices – changes in consumption, stock returns, and changes in human capital. When overconfident households try to predict house prices using noisy signals for those three variables, their posterior expectation is biased such that they over-respond to those signals. UK households appear to over-respond to changes in consumption and human capital, but they do not over-respond to stock returns. Interestingly, we find that when household overconfidence is removed, house prices in London have been flat since the 2008 financial crisis, indicating that the recent house price surge in London has been driven by household overconfidence in the outlook of the economy.
Discussant(s)
Min Hwang
,
George Washington University
Karen Pence
,
Federal Reserve Board
Hyojung Lee
,
University of Southern California
Josh Miller
,
U.S. Department of Housing and Urban Development
JEL Classifications
  • G1 - Asset Markets and Pricing
  • R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location