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House Prices, Local Demand and Retail Prices

Coauthor: Joseph Vavra

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We use detailed micro data to document a causal response of local retail prices to changes in house prices, with elasticities of 15%-20% across housing booms and busts. We provide evidence that our results are driven by changes in markups rather than changes in local costs. We argue that this markup variation arises through a wealth channel whereby increases in housing wealth reduce households' demand elasticity, and firms raise markups in response. Consistent with this channel, price effects are larger in zip codes with many homeowners, and non-existent in zip codes with mostly renters. In addition, shopping data confirms that house price changes have opposite effects on the price sensitivity of homeowners and renters. Our evidence has implications for monetary and urban economics, and suggests a new source of markup variation in business cycle models.

No-Bubble Condition: Model-Free Tests in Housing Markets

Coauthors: Stefano Giglio and Matteo Maggiori

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VoxEU

We test for the existence of classic rational bubbles in housing markets by directly measuring failures of the transversality condition that requires the present value of payments occurring infinitely far in the future to be zero. We study housing markets in the U.K. and Singapore, where residential property ownership takes the form of either leaseholds or freeholds. Leaseholds are finite maturity, pre-paid, and tradable ownership contracts with maturities often exceeding 700 years. Freeholds are infinite maturity ownership contracts. The price difference between leaseholds with extremely long maturities and freeholds reflects the present value of a claim to the freehold after leasehold expiry, and is thus a direct empirical measure of the transversality condition. We estimate this price difference, and find no evidence for classic rational bubbles in housing markets in the U.K. and Singapore, even during periods when a sizeable bubble was regularly thought to be present.

Testing for Information Asymmetries in Real Estate Markets

Revision requested at the Review of Financial Studies

Coauthor: Pablo Kurlat

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We study equilibrium outcomes in markets with asymmetric information about asset values among both buyers and sellers. In residential real estate markets hard-to-observe neighborhood characteristics are a key source of information heterogeneity: sellers are usually better informed about neighborhood values than buyers, but there are some sellers and some buyers that are better informed than their peers. We propose a new theoretical framework for analyzing such markets with many heterogeneous assets and differentially informed agents. Consistent with the predictions from this framework, we find that changes in the seller composition towards (i) more informed sellers and (ii) sellers with a larger supply elasticity predict subsequent house-price declines and demographic changes in that neighborhood. This effect is larger for houses whose value depends more on neighborhood characteristics, and smaller for houses bought by more informed buyers. Our findings suggest that home owners have superior information about important neighborhood characteristics, and exploit this information to time local market movements.

Government Intervention in the Housing Market - Who Wins, Who Loses?

Revision requested at the Journal of Monetary Economics

Coauthors: Max Floetotto and Michael Kirker

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We study the effects of government intervention in the housing market on prices, quantities and welfare in a general equilibrium model with heterogeneous agents. We consider (i) the introduction of temporary home purchase tax credits and (ii) a removal of the asymmetric tax treatment of owner-occupied and rental housing. Home buyer tax credits temporarily raise house prices and transaction volumes, but have negative welfare effects. Removing the asymmetric tax treatment of owner-occupied and rental housing would generate welfare gains for a majority of agents in a comparison of stationary equilibria. Welfare impacts are more varied, though still positive, along the transition between steady states.

The Power of the Church - The Role of Roman Catholic Teaching in the Transmission of HIV

Coauthor: Arthur van Benthem

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We use the appointment of a Kenyan Roman Catholic archbishop as a natural experiment to analyze the impact of church authorities' teaching on sexual behavior. Using a triple-difference approach, we find that following the archbishop's counter-doctrinal assertion that condom use within a marriage can be acceptable to reduce HIV infections, Catholic married couples within the archdiocese who had access to condoms were 7.0 percentage points more likely to use condoms than unmarried Catholics in the diocese, non-Catholics within the diocese, or Catholics in other dioceses. These results are quantitatively large and robust to a number of econometric specifications. The evidence for whether advocating condom use leads to an increase in infidelity or a decrease in respect for women is not conclusive. Our results suggest an important role for the Catholic church in the fight against HIV. This is especially relevant in light of Pope Benedict XVI's recent reconciliatory statement about condom use.

Foreclosure and Bankruptcy - Policy Conclusions from the Current Crisis

Coauthor: Theresa Kuchler

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The recent episode of rising consumer bankruptcies and increasing foreclosure rates has sparked a lively debate about how to best tackle the crisis in the U.S. housing market. We contribute to this debate by providing an explicit model of a household's joint decision to declare Chapter 7 bankruptcy and to enter into foreclosure. This model demonstrates how bankruptcy exemption limits and mortgage regulation interact to influence consumer bankruptcy and foreclosure rates. We use state-level data to show that our model predictions are empirically plausible. We suggest that policy proposals need to focus on reducing both foreclosures and bankruptcies jointly. In particular, we argue that in the short-run a switch from non-recourse mortgages to recourse mortgages may have little effect on the number of foreclosures, but could dramatically increase the number of bankruptcies.

Work in Progress

Segmented Housing Search

Coauthors: Monika Piazzesi and Martin Schneider

Adverse Selection and Market Power in Credit Card Markets

Coauthors: Sumit Agarwal, Souphala Chomsisengphet, and Neale Mahoney

Published or Forthcoming Papers

Very Long-Run Discount Rates

Quarterly Journal of Economics , Forthcoming

Coauthors: Stefano Giglio and Matteo Maggiori

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Appendix

Expected Housing Returns

Historical House Prices

VoxEU

Winner Jacob Gold & Associates Best Paper Prize, ASU Sonoran Winter Finance Conference 2014

Media Coverage:

Forbes

Economist

National Review

CBS News

Business Spectator

We provide direct estimates of how agents trade off immediate costs and uncertain future benefits that occur in the very long run, 100 or more years away. We exploit a unique feature of housing markets in the U.K. and Singapore, where residential property ownership takes the form of either leaseholds or freeholds. Leaseholds are temporary, pre-paid, and tradable ownership contracts with maturities between 99 and 999 years, while freeholds are perpetual ownership contracts. The difference between leasehold and freehold prices reflects the present value of perpetual rental income starting at leasehold expiry, and is thus informative about very long-run discount rates. We estimate the price discounts for varying leasehold maturities compared to freeholds and extremely long-run leaseholds via hedonic regressions using proprietary datasets of the universe of transactions in each country. Agents discount very long-run cash flows at low rates, assigning high present values to cash flows hundreds of years in the future. For example, 100-year leaseholds are valued at more than 10% less than otherwise identical freeholds, implying discount rates below 2.6% for 100-year claims. Given the riskiness of rents, this suggests that both long-run risk-free discount rates and long-run risk premia are low. We show how the estimated very long-run discount rates are informative for climate change policy.

Asymmetric Information about Collateral Values

Journal of Finance , Forthcoming

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VoxEU

I empirically analyze credit market outcomes when competing lenders are differentially informed about the expected return from making a loan. I study the residential mortgage market where property developers often cooperate with vertically integrated mortgage lenders to offer financing to buyers of new homes. I show that these integrated lenders have superior information about the construction quality of individual homes and exploit this information to lend against higher-quality collateral, decreasing foreclosures by up to 40%. To compensate for this adverse selection on collateral values, non-integrated lenders charge higher interest rates when competing against a better-informed integrated lender.

Regulating Consumer Financial Products: Evidence from Credit Cards

Quarterly Journal of Economics , Forthcoming

Coauthors: Sumit Agarwal, Souphala Chomsisengphet and Neale Mahoney

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Media Coverage:

New York Times

Businessweek

Bloomberg

Washington Post

Slate

Fox

Yahoo

US News

We analyze the effectiveness of consumer financial regulation by considering the 2009 Credit Card Accountability Responsibility and Disclosure (CARD) Act. We use a panel data set covering 160 million credit card accounts and a difference-in-differences research design that compares changes in outcomes over time for consumer credit cards, which were subject to the regulations, to changes for small business credit cards, which the law did not cover. We estimate that regulatory limits on credit card fees reduced overall borrowing costs by an annualized 1.6% of average daily balances, with a decline of more than 5.3% for consumers with FICO scores below 660. We find no evidence of an offsetting increase in interest charges or a reduction in the volume of credit. Taken together, we estimate that the CARD Act saved consumers $11.9 billion per year. We also analyze a nudge that disclosed the interest savings from paying off balances in 36 months rather than making minimum payments. We detect a small increase in the share of accounts making the 36-month payment value but no evidence of a change in overall payments.

A Simple Framework for Estimating Consumer Benefits from Regulating Hidden Fees

Journal of Legal Studies , 43(S2), June 2014

Coauthors: Sumit Agarwal, Souphala Chomsisengphet and Neale Mahoney

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[WP Version]

Policymakers are increasingly turning to regulation to reduce hidden or non-salient fees. Yet the overall consumer benefits from these polices are uncertain because firms may increase other prices to offset lost fee revenue. We show that the extent to which firms offset reduced hidden fee revenue is determined by a simple equation that combines two "sufficient statistics," which can be estimated or calibrated in a wide range of settings: (i) a parameter that captures the degree of market competitiveness and (ii) a parameter that captures the salience of the hidden fee. We provide corroborating evidence for this approach by drawing upon evidence on the effect of fee regulation under the 2009 CARD Act. We also illustrate the applicability of our approach by using the framework to assess a hypothetical regulation of airline baggage fees.

Resource Extraction Contracts Under Threat of Expropriation: Theory and Evidence

Review of Economics and Statistics , 95(5), December 2013

Coauthor: Arthur van Benthem

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[WP Version]

VoxEU

Knowledge@Wharton

We use fiscal data on 2,468 oil extraction agreements in 38 countries to study tax contracts between resource-rich countries and independent oil companies. We analyze why expropriations occur and what determines the degree of oil price exposure of host countries. With asymmetric information about a country's expropriation cost even optimal contracts feature expropriations. Near-linearity in the oil price of real-world hydrocarbon contracts also helps to explain expropriations. We show theoretically and verify empirically that oil price insurance provided by tax contracts is increasing in a country's cost of expropriation, and decreasing in its production expertise. The timing of actual expropriations is consistent with our model.

Estimated Impact of the Fed's Mortgage-Backed Securities Purchase Program

International Journal of Central Banking , 8(2), June 2012

Coauthor: John B. Taylor

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VoxEU

Media Coverage:

Bloomberg

Fox

The largest credit or liquidity program created by the Federal Reserve during the financial crisis was the mortgage-backed securities (MBS) purchase program. In this paper, we examine the quantitative impact of this program on mortgage interest rate spreads. This is more difficult than frequently perceived because of simultaneous changes in prepayment risk and default risk. Our empirical results attribute a sizeable portion of the decline in mortgage rates to such risks and a relatively small and uncertain portion to the program. For specifications where the existence or announcement of the program appears to have lowered spreads, we find no separate effect of the stock of MBS purchased by the Fed.