Borrower Risk and Housing Price Appreciation
- 243 Downloads
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.
KeywordsHouse appreciation Probability of default
We thank the editors and referee for helpful comments. Hayunga gratefully acknowledges financial support from the Terry-Sanford Research Award.
- Arnold, B.M. (1959). After-acquired property as mortgage security in Maryland. Maryland Law Review, 19, 294–319.Google Scholar
- 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
- 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
- Koo, R., & Sasaki, M. (2008). Obstacles to affluence: thoughts on Japanese housing. NRI Papers 137.Google Scholar
- 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
- 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
- Quercia, R. (1997). House value appreciation among older homeowners: implications for reverse mortgage programs. Journal of Housing Research, 8, 201–223.Google Scholar
- Tanaka, M. (2008). Essays on durability and the Japanese housing market. John Hopkins University.Google Scholar