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Residential Stability or Rational Bubble: Proposition 13 in Southern California

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Author Info

  • Mark Hoven Stohs

    ()
    (Department of Finance, College of Business and Economics, California State University, Fullerton, CA 92834)

  • Yun W. Park

    (Department of Finance, College of Business and Economics, California State University, Fullerton, CA 92834)

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    Abstract

    California’s Proposition 13, which limits the growth of property tax to 2 percent per year, provides homeowners an incentive to remain in their housing units and thus contributes to residential stability. Yet, with fast home price appreciation, new home buyers may purchase a home and then sell it again within a short period of time. Even though they incur transaction costs, they can gain by the appreciation. Under Proposition 13, faced with a disproportionately large property tax relative to those homeowners who purchased their homes a long time ago at a much lower price, the new homebuyers have an additional incentive to trade homes fast in an up market to avoid paying a high property tax. We call this short term residential trading ‘Proposition 13 risk arbitrage’ and predict that Proposition 13 induces additional short-term residential trading, which adds to the underlying residential market speculation. Cross-sectional variations of the residential holding periods over the 1993 to 2001 period in the five counties of Southern California are generally consistent with the predictions based on Proposition 13 induced trading: Households which face a higher property tax per square foot and those that experience larger capital gains show a shorter holding period. We also explain the time variation of the aggregate residential holding period using the Proposition 13 risk arbitrage argument.

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    Bibliographic Info

    Article provided by Asian Real Estate Society in its journal International Real Estate Review.

    Volume (Year): 10 (2007)
    Issue (Month): 1 ()
    Pages: 26-47

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    Handle: RePEc:ire:issued:v:10:n:01:2007:p:26-47

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    Postal: Asia Real Estate Society, 51 Monroe Street, Plaza E-6, Rockville, MD 20850, USA
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    Web page: http://www.asres.org/

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    Postal: Asian Real Estate Society, 51 Monroe Street, Plaza E-6, Rockville, MD 20850, USA
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    Related research

    Keywords: Proposition 13; property tax; residential holding period decision; residential stability; risk arbitrage; Proposition 13 risk arbitrage;

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Benjamas Jirasakuldech & Robert Campbell & John Knight, 2006. "Are There Rational Speculative Bubbles in REITs?," The Journal of Real Estate Finance and Economics, Springer, vol. 32(2), pages 105-127, March.
    2. Mark Mitchell, 2001. "Characteristics of Risk and Return in Risk Arbitrage," Journal of Finance, American Finance Association, vol. 56(6), pages 2135-2175, December.
    3. Mark J. Eppli & Monty J. Childs, 1995. "A Descriptive Analysis of U.S. Housing Demand for the 1990s," Journal of Real Estate Research, American Real Estate Society, vol. 10(1), pages 69-86.
    4. G. Donald Jud & Terry G. Seaks, 1994. "Sample Selection Bias in Estimating Housing Sales Prices," Journal of Real Estate Research, American Real Estate Society, vol. 9(3), pages 289-298.
    5. Roland Benabou, 1991. "Workings of a City: Location, Education, and Production," NBER Technical Working Papers 0113, National Bureau of Economic Research, Inc.
    6. Mark Hoven Stohs & Paul Childs & Simon Stevenson, 2001. "Tax Policies and Residential Mobility," International Real Estate Review, Asian Real Estate Society, vol. 4(1), pages 95-117.
    7. Aaronson, Daniel, 2001. "Neighborhood Dynamics," Journal of Urban Economics, Elsevier, vol. 49(1), pages 1-31, January.
    8. Epple, Dennis & Romer, Thomas, 1991. "Mobility and Redistribution," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 828-58, August.
    9. Baker, Malcolm & Savasoglu, Serkan, 2002. "Limited arbitrage in mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 64(1), pages 91-115, April.
    10. Potepan, Michael J., 1989. "Interest rates, income, and home improvement decisions," Journal of Urban Economics, Elsevier, vol. 25(3), pages 282-294, May.
    11. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
    12. Quigley, John M, 1987. "Interest Rate Variations, Mortgage Prepayments and Household Mobility," The Review of Economics and Statistics, MIT Press, vol. 69(4), pages 636-43, November.
    13. Nada Wasi & Michelle J. White, 2005. "Property Tax Limitations and Mobility: The Lock-in Effect of California's Proposition 13," NBER Working Papers 11108, National Bureau of Economic Research, Inc.
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