Three Essays on Urban and Real Estate Economics
Open AccessThis dissertation consists of three essays on urban and real estate economics. The three essays are related to the standard urban model, elasticity of substitution of structure for land, conventional mortgage interest rates, future house price appreciation rates and foreclosure timeline cost. Chapter 1 confirms the standard urban model and measures the elasticity of substitution between land and structure for both low and high density constructions. Chapter 2 estimates the Jumbo/Conforming mortgage interest rate spread (the spread) and its relation to future house price appreciation rates. Chapter 3 extends Chapter 2, investigating the relation between lending performance in the conventional mortgage market (i.e. mortgage interest rates and loan amounts) and foreclosure cost.Chapter 1 estimates the elasticity of substitution between land and structure for constructions with a wide range of floor area ratios (FARs), thus capturing the substitution effects between land and structure to the maximum extent. Land values are based on actual transactions instead of imputations from assessments. Alternative estimates of the elasticity of substitution using assessments for low density housing are constructed. Unitary elasticity of substitution between land and structure is identified in the latter situation. The results suggest that assessors might use the Cobb-Douglas production function but the market does not.Chapter 2 demonstrates that there is a systematic divergence in the jumbo/conforming interest rate spread and house price appreciation rates across states and MSAs in the United States. It shows this spatial variation is negatively correlated with the rate of future house price appreciation. In addition, it shows that this spatial variation in the spread is not simply explained by the “usual suspects” of median household income, population or unemployment rate. The motivation for this test was to determine whether mortgage investors accurately priced the credit risk during housing bubbles. The results show clearly that the market was aware of the differential risk across local housing markets, although the two government sponsored enterprises (GSEs) and FHA could not price spatially.Government interventions in mortgage servicing practices significantly extended foreclosure timelines as documented in Cordell et al. (2015). The foreclosure timeline cost, measured as a percentage of the loan balance, increased dramatically after the 2008 financial crisis especially in judicial states. Without any offsetting benefits, the extended foreclosure timeline increased lending costs in the form of excess depreciation and hazard insurance payments by servicers. As an extension of Chapter 2, Chapter 3 investigates whether the foreclosure timeline cost is properly priced at mortgage origination by testing the relation of foreclosure timeline cost with interest rate and loan amount respectively. Contrary to risk pricing, neither the conforming nor the jumbo market appears to respond to the rising foreclosure timeline cost through higher interest rate premiums or tighter credit standards on new loan originations.
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