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Housing Return And Construction Cycles

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  • Matthew Spiegel

Abstract

This paper presents a model of a mature city that depends upon the rehabilitation of old home sites for new housing. Within the model housing returns, housing construction, mortgage loan terms, and household maintenance behavior are all endogenous. The model?s premise is that the value of a home, unlike the value of many other financial assets, depends upon the care its owner exerts on upkeep. Banks respond to this moral hazard problem by restricting the size of the loans they are willing to issue. As a result people bid what the can for housing, rather than what they may wish to. This in turn ties housing prices to changes in the endowment process which are both predictable and time varying. When endowments are growing quickly (a city with a rapidly growing economy) housing prices exhibit above market expected returns. Because banks within the model act rationally, they set mortgage terms based upon their beliefs regarding future housing prices. This leads to the empirically verified prediction that current mortgage loan to value ratios can be used to forecast future housing returns. Developers are also fully cognizant of how housing prices are set and react accordingly. When housing prices are expected to increase faster than the rate of interest developers acquire land for construction. Then once the developers believe housing returns will stop increasing they develop an

Suggested Citation

  • Matthew Spiegel, 1999. "Housing Return And Construction Cycles," Yale School of Management Working Papers ysm114, Yale School of Management, revised 01 Mar 2001.
    • Handle: RePEc:ysm:somwrk:ysm114
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    File URL: http://icfpub.som.yale.edu/publications/2577
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    References listed on IDEAS

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    Cited by:

    1. Markus K. Brunnermeier & Christian Julliard, 2008. "Money Illusion and Housing Frenzies," The Review of Financial Studies, Society for Financial Studies, vol. 21(1), pages 135-180, January.
    2. Pedro A.C. Saffi & Carles Vergara‐Alert, 2020. "The Big Short: Short Selling Activity and Predictability in House Prices," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 48(4), pages 1030-1073, December.
    3. Christopher J. Mayer & Tomasz Piskorski & Alexei Tchistyi, 2010. "The Inefficiency of Refinancing: Why Prepayment Penalties Are Good for Risky Borrowers," NBER Working Papers 16586, National Bureau of Economic Research, Inc.
    4. Ghysels, Eric & Plazzi, Alberto & Valkanov, Rossen & Torous, Walter, 2013. "Forecasting Real Estate Prices," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 509-580, Elsevier.
    5. Otto Van Hemert, 2010. "Household Interest Rate Risk Management," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 38(3), pages 467-505, September.
    6. Clapp, John M. & Bardos, Katsiaryna Salavei & Wong, S.K., 2012. "Empirical estimation of the option premium for residential redevelopment," Regional Science and Urban Economics, Elsevier, vol. 42(1-2), pages 240-256.
    7. John Krainer & Mark M. Spiegel & Nobuyoshi Yamori, 2010. "Asset Price Persistence and Real Estate Market Illiquidity: Evidence from Japanese Land Values," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 38(2), pages 171-196, June.
    8. Tang, Edward Chi Ho & Leung, Charles Ka Yui & Ng, Joe Cho Yiu, 2018. "Does an Oligopolistic Primary Market Matter? The Case of an Asian Housing Market," MPRA Paper 93680, University Library of Munich, Germany.
    9. Linlin Zhao & Jasper Mbachu & Zhansheng Liu, 2019. "Exploring the Trend of New Zealand Housing Prices to Support Sustainable Development," Sustainability, MDPI, vol. 11(9), pages 1-18, April.

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