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Omitted Mobility Characteristics and Property Market Dynamics: Application to Mortgage Termination

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  • Xudong An

    ()

  • John Clapp

    ()

  • Yongheng Deng

    ()

Abstract

Property market dynamics depend on changes in long run equilibrium and on impediments to adjustment towards equilibrium. One of the most important aspects of property market dynamics is often attributed to the activities in the mortgage market. However, many impediment factors, such as changes in family status, education, neighborhood effects and job relocation, are often unobservable from micro household-level data. Since these omitted variables contribute to moving decisions and therefore to sale and default decisions, utility functions for sale and default are correlated through these unobservable variables; thus, the IIA assumption of the widely used Multinomial Logit Model (MNL) is violated. Under such circumstances, econometric theory suggests that the Nested Logit Model (NMNL) is a better choice, which obviates the limitation of MNL by allowing correlation in unobserved factors across alternatives. This paper empirically investigates the omitted household mobility characteristics problem in mortgage termination, and tests NMNL against MNL. Using loan level micro data, we find significant correlation between sale and default due to omitted borrower mobility characteristics. Our simulations find that NMNL out performs MNL in out-of-sample prediction.
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  • Xudong An & John Clapp & Yongheng Deng, 2010. "Omitted Mobility Characteristics and Property Market Dynamics: Application to Mortgage Termination," The Journal of Real Estate Finance and Economics, Springer, vol. 41(3), pages 245-271, October.
  • Handle: RePEc:kap:jrefec:v:41:y:2010:i:3:p:245-271
    DOI: 10.1007/s11146-008-9157-8
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    Cited by:

    1. Chao Tian & Roberto Quercia & Sarah Riley, 2016. "Unemployment as an Adverse Trigger Event for Mortgage Default," The Journal of Real Estate Finance and Economics, Springer, vol. 52(1), pages 28-49, January.
    2. Xudong An & Yongheng Deng & Eric Rosenblatt & Vincent Yao, 2012. "Model Stability and the Subprime Mortgage Crisis," The Journal of Real Estate Finance and Economics, Springer, vol. 45(3), pages 545-568, October.
    3. Roberto G. Quercia & Anthony Pennington-Cross & Chao Yue Tian, 2016. "Differential Impacts of Structural and Cyclical Unemployment on Mortgage Default and Prepayment," The Journal of Real Estate Finance and Economics, Springer, vol. 53(3), pages 346-367, October.
    4. Chiang, Shu Ling & Yang, Tyler T. & Tsai, Ming Shann, 2016. "Assessing mortgage servicing rights using a reduced-form model: Considering the effects of interest rate risks, prepayment and default risks, and random state variables," Journal of Housing Economics, Elsevier, vol. 32(C), pages 29-46.
    5. Chao Yue Tian & Roberto G. Quercia & Sarah Riley, 2016. "Unemployment as an Adverse Trigger Event for Mortgage Default," The Journal of Real Estate Finance and Economics, Springer, vol. 52(1), pages 28-49, January.
    6. Liang, Te-Hsin & Lin, Jian-Bang, 2014. "A two-stage segment and prediction model for mortgage prepayment prediction and management," International Journal of Forecasting, Elsevier, vol. 30(2), pages 328-343.

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