Borrower Risk and Housing Price Appreciation

  • Darren K. HayungaEmail author
  • R. Kelley Pace
  • Shuang Zhu


Maintenance and improvements affect house values and thus the observed pecuniary return. Whether due to lack of liquidity or the presence of strategic incentives, some borrowers have a higher probability of default and this could lead to lower maintenance and investment in the property. We test this hypothesis using a sample of properties on which we have repeat sales and mortgage information. We find that the predicted probability of default at the time of the original purchase significantly reduces subsequent observed pecuniary return. For instance, an increase in the probability of default from 22% to 32% leads to an 0.5% reduction in appreciation per year. Because the future house price varies with borrower risk, we examine many simulated scenarios to analyze the implications of the findings. From these scenarios, we observe that the highest risk borrowers can experience approximately 3% less appreciation per year than the lowest risk borrowers.


House appreciation Probability of default 



We thank the editors and referee for helpful comments. Hayunga gratefully acknowledges financial support from the Terry-Sanford Research Award.


  1. Agarwal, S., Chang, Y., Yavas, A. (2012). Adverse selection in mortgage securitization. Journal of Financial Economics, 105(3), 640–660.CrossRefGoogle Scholar
  2. Agarwal, S., Ambrose, B., Yildirim, Y. (2015). The subprime virus. Real Estate Economics, 43(4), 891–915.CrossRefGoogle Scholar
  3. Ambrose, B.W., LaCour-Little, M., Sanders, A.B. (2005). Does regulatory capital arbitrage, reputation, or asymmetric information drive securitization? Journal of Financial Services Research, 28(1–3), 113–133.CrossRefGoogle Scholar
  4. Arnold, B.M. (1959). After-acquired property as mortgage security in Maryland. Maryland Law Review, 19, 294–319.Google Scholar
  5. Aroul, R.R., & Hansz, J.A. (2014). The valuation impact on distressed residential transactions: anatomy of a housing price bubble. Journal of Real Estate Finance and Economics, 49, 277–302.CrossRefGoogle Scholar
  6. Behn, M., Haselmann, R., Wachtel, P. (2016). Procyclical capital regulation and lending. The Journal of Finance, 71(2), 919–956.CrossRefGoogle Scholar
  7. Boehm, T.P., & Ihlanfeldt, K.R. (1986). The improvement expenditures of urban homeowners: an empirical analysis. AREUEA Journal, 14(1), 48–60.CrossRefGoogle Scholar
  8. Campbell, J.Y., Giglio, S., Pathak, P. (2011). Forced sales and house prices. American Economic Review, 101(5), 2108–2131.CrossRefGoogle Scholar
  9. Davidoff, T. (2004). Maintenance and the home equity of the elderly. Fisher Center for Real Estate and Urban Economics Paper, Issue 03–288.Google Scholar
  10. Demyanyk, Y., & Van Hemert, O. (2011). Understanding the subprime mortgage crisis. The Review of Financial Studies, 24(6), 1848–1880.CrossRefGoogle Scholar
  11. Deng, Y., Quigley, J.M., Van Order, R. (2000). Mortgage terminations, heterogeneity and the exercise of mortgage options. Econometrica, 68(2), 275–307.CrossRefGoogle Scholar
  12. Foster, T.B., & Kleit, R.G. (2015). The changing relationship between housing and inequality, 1980–2010. Housing Policy Debate, 25(1), 16–40.CrossRefGoogle Scholar
  13. Grinstein-Weiss, M., Key, C., Guo, S., Yeo, Y.H., Holub, K. (2013). Homeownership and wealth among low-and moderate-income households. Housing Policy Debate, 23(2), 259–279.CrossRefGoogle Scholar
  14. Harding, J., Miceli, T.J., Sirmans, C.F. (2000). Do owners take better care of their housing than renters Real Estate Economics, 28(4), 663–681.CrossRefGoogle Scholar
  15. Harding, J.P., Rosenthal, S.S., Sirmans, C.F. (2007). Depreciation of housing capital, maintenance, and house price inflation: Estimates from a repeat sales model. Journal of Urban Economics, 61(2), 193–217.CrossRefGoogle Scholar
  16. Herbert, C.E., McCue, D.T., Sanchez-Moyano, R. (2014). Is homeownership still an effective means of building wealth for low-income and minority households? (Was it ever?) Harvard University, Joint Center for Housing Studies.Google Scholar
  17. Kau, J.B., Keenan, D.C., Yildirim, Y. (2009). Estimating default probabilities implicit in commercial mortgage backed securities (CMBS). The Journal of Real Estate Finance and Economics, 39(2), 107–117.CrossRefGoogle Scholar
  18. Kau, J.B., Keenan, D.C., Lyubimov, C. (2014). First mortgages, second mortgages, and their default. The Journal of Real Estate Finance and Economics, 48 (4), 561–588.CrossRefGoogle Scholar
  19. Koo, R., & Sasaki, M. (2008). Obstacles to affluence: thoughts on Japanese housing. NRI Papers 137.Google Scholar
  20. Kumar, A. (2015). Do restrictions on home equity extraction contribute to lower mortgage defaults? Evidence from a policy discontinuity at the Texas border. Federal Reserve Bank of Dallas working paper 1410.Google Scholar
  21. Laufer, S. (2018). Equity extraction and mortgage default. Review of Economic Dynamics, 28, 1–33.CrossRefGoogle Scholar
  22. Mankiw, G., & Weil, D. (1989). The baby boom, the baby bust, and the housing market. Regional Science and Urban Economics, 19, 235–258.CrossRefGoogle Scholar
  23. Ortalo-Magné, F., & Prat, A. (2014). On the political economy of urban growth: homeownership versus affordability. American Economic Journal: Microeconomics, 6 (1), 154–181.Google Scholar
  24. Pitkin, J.R., & Myers, D. (1994). The specification of demographic effects on housing demand: avoiding the age-cohort fallacy. Journal of Housing Economics, 3 (3), 240–250.CrossRefGoogle Scholar
  25. Quercia, R. (1997). House value appreciation among older homeowners: implications for reverse mortgage programs. Journal of Housing Research, 8, 201–223.Google Scholar
  26. Tanaka, M. (2008). Essays on durability and the Japanese housing market. John Hopkins University.Google Scholar
  27. Turnbull, G.K., & Zahirovic-Herbert, V. (2012). The transitory and legacy effects of the rental externality on house price and liquidity. The Journal of Real Estate Finance and Economics, 44(3), 275–297.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Department of Insurance, Legal Studies and Real EstateUniversity of GeorgiaAthensUSA
  2. 2.LREC Endowed Chair of Real Estate, Department of FinanceLouisiana State UniversityBaton RougeUSA
  3. 3.Department of FinanceKansas State UniversityManhattanUSA

Personalised recommendations