Commentary

This paper was presented at the conference "Policies to Promote Affordable Housing," cosponsored by the Federal Reserve Bank of New York and New York University's Furman Center for Real Estate and Urban Policy, February 7, 2002. It was part of Session 4: Housing Subsidies and Finance, and is a commentary on "Comparing the costs of federal housing assistance programs" by Denise DiPasquale, Dennis Fricke and Daniel Garcia-Diaz.Housing - Finance ; Rent ; Housing policy ; Housing - Prices ; Construction industry ; Housing subsidies

The Ongoing Financial Upheaval: Understanding the Sources and Way Out

The present period of financial instability is also likely to become known as the end of an era; an era of economic calm and policy consensus on ways to maintain market stability. After World War II, the federal government operated on the Keynesian principles that the right mix of spending, regulation, and interest rates could tame economic cycles and eliminate surges of unemployment. In this period, now known as the Great Moderation, we assumed that we knew how to prevent economic crises, such as the recurrence of the Great Depression. However, it is clear that those principles were erroneous as the economy has entered a lesser, but still severe downturn; the Great Recession. This paper looks at the sources of the ongoing economic crisis and points to the unique role in its origins of real estate asset bubbles and mispriced credit, not only in the origin of this crisis, but of many financial crises. An analysis of the data points to the role of mispriced mortgage backed securities (MBS) in the spread of aggressive mortgage products and the unwarranted price speculation that resulted in massive foreclosures. In turn, the paper addresses the source of mispriced risk in MBS as incomplete markets in real estate and non-tradability of MBS and related securities, which ultimately led to the collapse of financial system, threatening global economic health. The paper also suggests corrective measures that can and should be taken to assist the short and long term recovery.

The housing finance revolution

Housing ; Housing - Prices ; Mortgages

Next Steps in the Housing Finance Reform Saga

Momentum seemed to be escalating in early 2014 for the passage of a comprehensive reform package of the housing finance system in the U.S., but that was not to be, as neither political party fully supported its passage, derailing the progress made over the previous few years. While consensus around the primary features of reform has grown, new research that questions these assumptions needs to be addressed and the inertia keeping the country mired in the current, uncertain system needs to be overcome. In this brief, we will discuss the progress made thus far en route to reform, analyze the disparate elements of the leading proposals, and incorporate new findings that will shape the additional research that must be done before policymakers can agree on the best path forward.https://repository.upenn.edu/pennwhartonppi/1025/thumbnail.jp

Interjurisdictional Price Effects of Land Use Controls

Empirical economic literature has focused on the externality effects of land use controls. However, if the open-city model does not hold, regulations may have monopoly price effects as well. This Article examines whether the increasing price of developable land sites contributes to regionally based housing affordability problems

The Inevitability of Marketwide Underpricing of Mortgage Default Risk

Lenders are frequently accused of mispricing the put option embedded in nonrecourse lending. Prior research shows one lender\u27s incentives to underprice. Here, we identify the conditions for a marketwide underpricing equilibrium. We demonstrate that, in a market with many players, given sufficient time, a race to the bottom and marketwide mispricing are inevitable. Underpricing occurs because bank managers and shareholders exploit mispriced deposit insurance. We show that the probability of the underpricing equilibrium increases with time since the previous market crash and that the more volatile the underlying asset market, the more likely it is subject to underpricing

Immigration and the Neighborhood

Within metropolitan areas, neighborhoods of growing immigrant settlement are becoming relatively less desirable to natives. We deploy a geographic diffusion model to instrument for the growth of immigrant density in a neighborhood. Our approach deals explicitly with potential unobservable shocks that may be correlated with proximity to immigrant enclaves. The evidence is consistent with a causal interpretation of an impact from growing immigrant density to native flight and relatively slower housing value appreciation. Further evidence indicates that these results are driven more by the demand for residential segregation based on ethnicity and education than by foreignness per se

Subprime Lending and Real Estate Prices

This article establishes a theoretical and empirical link between the use of aggressive mortgage lending instruments, such as interest-only, negative-amortization or subprime mortgages, and the underlying house prices. Such instruments, which come into existence through innovation or financial deregulation, allow more borrowing than otherwise would occur in previously affordability-constrained markets. Within the context of a model with an endogenous rent-buy decision, we demonstrate that the supply of aggressive lending instruments temporarily increases the asset prices in the underlying market because agents find it more attractive to own or because their borrowing constraint is relaxed, or both. This result implies that the availability of aggressive mortgage lending instruments magnifies the real estate cycle and the effects of fundamental demand shocks. We empirically confirm the predictions of the model using recent subprime origination experience. In particular, we find that regions that receive a high concentration of aggressive lending instruments experience larger price increases and subsequent declines than areas with low concentration of such instruments. This result holds in the presence of various controls and instrumental variables

Green investment strategies: a positive force in cities

Deterioration of urban neighborhoods is known to induce out migration, but how well do public investments to reverse decline actually work? To evaluate Philadelphia’s greening investment, researchers measured property buyers’ willingness to pay more—and found that greening works.Community development