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Mortgage Default Risk and Real Estate Prices: The Use of Index-Based Futures and Options in Real Estate

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Abstract

Evidence is shown, using US foreclosure data by state 1975-93, that periods of high default rates on home mortgages strongly tend to follow real estate price declines or interruptions in real estate price increase. The relation between price decline and foreclosure rates is modelled using a distributed lag. Using this model, holders of residential mortgage portfolios could hedge some of the risk of default by taking positions in futures or options markets for residential real estate prices, were such markets to be established.

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  • Robert J. Shiller & Karl E. Case & Allan N. Weiss, 1995. "Mortgage Default Risk and Real Estate Prices: The Use of Index-Based Futures and Options in Real Estate," Cowles Foundation Discussion Papers 1098, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:1098
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    1. Case, Karl E & Shiller, Robert J, 1989. "The Efficiency of the Market for Single-Family Homes," American Economic Review, American Economic Association, vol. 79(1), pages 125-137, March.
    2. John P. Herzog & James S. Earley, 1970. "Home Mortgage Delinquency and Foreclosure," NBER Books, National Bureau of Economic Research, Inc, number herz70-1, March.
    3. Shiller, Robert J & Weiss, Allan N, 1999. "Home Equity Insurance," The Journal of Real Estate Finance and Economics, Springer, vol. 19(1), pages 21-47, July.
    4. Karl E. Case & Robert J. Shiller & Allan N. Weiss, 1991. "Index-Based Futures and Options Markets in Real Estate," Cowles Foundation Discussion Papers 1006, Cowles Foundation for Research in Economics, Yale University.
    5. Cunningham, Donald F & Capone, Charles A, Jr, 1990. "The Relative Termination Experience of Adjustable to Fixed-Rate Mortgages," Journal of Finance, American Finance Association, vol. 45(5), pages 1687-1703, December.
    6. Neil A. Stevens, 1976. "A mortgage futures market: its development, uses, benefits, and costs," Review, Federal Reserve Bank of St. Louis, vol. 58(Apr), pages 12-19.
    7. Kau James B. & Keenan Donald C. & Kim Taewon, 1994. "Default Probabilities for Mortgages," Journal of Urban Economics, Elsevier, vol. 35(3), pages 278-296, May.
    8. Johnston, Elizabeth Tashjian & McConnell, John J, 1989. "Requiem for a Market: An Analysis of the Rise and Fall of a Financial Futures Contract," The Review of Financial Studies, Society for Financial Studies, vol. 2(1), pages 1-23.
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    Cited by:

    1. Barney Hartman‐Glaser & Benjamin Hébert, 2020. "The Insurance Is the Lemon: Failing to Index Contracts," Journal of Finance, American Finance Association, vol. 75(1), pages 463-506, February.
    2. Buckley, Robert & Karaguishiyeva, Gulmira & Van Order, Robert & Vecvagare, Laura, 2003. "Comparing mortgage credit risk policies : an options-based approach," Policy Research Working Paper Series 3047, The World Bank.
    3. Felix Schindler, 2014. "Persistence and Predictability in UK House Price Movements," The Journal of Real Estate Finance and Economics, Springer, vol. 48(1), pages 132-163, January.
    4. Catarina Figueira & John Glen & Joseph Nellis, 2005. "A Dynamic Analysis of Mortgage Arrears in the UK Housing Market," Urban/Regional 0509006, University Library of Munich, Germany.
    5. Berg, Nathan & Gu, Anthony Y. & Lien, Donald, 2007. "Dynamic correlation: A tool hedging house-price risk?," MPRA Paper 26368, University Library of Munich, Germany.
    6. Koetter, Michael & Poghosyan, Tigran, 2008. "Real estate markets and bank distress," Discussion Paper Series 2: Banking and Financial Studies 2008,18, Deutsche Bundesbank.
    7. Robert Buckley & Gulmira Karaguishiyeva & Robert Order & Laura Vecvagare, 2006. "Mortgage credit risk in EU countries: Constraints on exploiting the single currency market," European Journal of Law and Economics, Springer, vol. 21(1), pages 13-27, January.
    8. Felix Schindler, 2013. "Predictability and Persistence of the Price Movements of the S&P/Case-Shiller House Price Indices," The Journal of Real Estate Finance and Economics, Springer, vol. 46(1), pages 44-90, January.
    9. Abel Cadenillas & Robert Elliott & Hong Miao & Zhenyu Wu, 2009. "Risk-Hedging in Real Estate Markets," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 16(4), pages 265-285, December.
    10. Catarina Figueira & John Glen & Joseph Nellis, 2005. "A Dynamic Analysis of Mortgage Arrears in the UK Housing Market," Urban Studies, Urban Studies Journal Limited, vol. 42(10), pages 1755-1769, September.

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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