East Asian Seminar on Economics

June 23-24, 2016
Takatoshi Ito of Columbia University and Andrew K. Rose of the University of California, Berkeley, Organizers

Bo Zhao, China Center for Economic Research

Too Poor to Retire? Housing Prices and Retirement

In this paper, Zhao documents two facts. First, the near-retirement households among all working-age groups in the U.S. experienced larger drops in consumption and greater increases in labor force participation during the financial crisis of 2007 to 2009. Second, the retirement probability for the near-retirement home-owners (but not for renters) decreases more in those areas where house prices also decline more. This paper argues that the wealth effect of house prices on retirement can account for this fact. It creates a calibrated incomplete-market life-cycle partial-equilibrium model with risky housing assets and endogenous retirement. It first verifies that the joint response of retirement and non-durable consumption implied by the structural model is consistent with the empirical findings using data from the Health and Retirement Study 1992 to 2012. It then shows that after a one-time unexpected 27.7 percent house price decline, the near-retirement home-owners aged 55-64 will reduce their non-durable consumption by 4.7 percent and increases their LFP by 0.96 percentage points immediately and delay their retirement by 3 months in the long run. The model also quantifies endogenous retirement as self-insurance for the elderly homeowners against house price risk.

Mathias Hoffmann, University of Zurich, and Iryna S. Stewen, University Mainz

Holes in the Dike: The Global Savings Glut, U.S. House Prices and the Long Shadow of Banking Deregulation

Hoffmann and Stewen show how capital inflows into and financial deregulation within the United States interacted in driving the recent boom and bust in U.S. housing prices. Interstate banking deregulation during the 1980s cast a long shadow: in states that opened their banking markets to out-of-state banks earlier, house prices were more sensitive to aggregate U.S. capital inflows during 1990-2012. Capital inflows relaxed the value-at-risk constraints of geographically diversified ('integrated') U.S. banks more than those of local banks. Therefore, integrated banks absorbed a larger share of capital inflows and expanded mortgage lending more. This drove up housing prices.

Inho Song, KDI

The Asset Price of a House

Song studies how an asset-pricing model is derived for a house based on conditions from the rental and mortgage capital markets. The house's rent-price ratio has factors for expected real appreciation, mortgage rates and inflation. Each factor's coefficient is its rent-price incidence, or proportion of shocks borne by tenant users. Over 1981-2013 U.S. houses are near bonds. Rent-price yields reflect only 17% of real house asset price or mortgage shocks. A house's equity premium is bond-like at 1.05% annually, one-quarter that of stocks. During 1998-2004 houses earn a stock-like equity premium above 5% annually before reverting, potentially presaging the crisis.

Hanming Fang, University of Pennsylvania and NBER, and You Suk Kim and Wenli Li, Federal Reserve Board

The Dynamics of Adjustable-Rate Subprime Mortgage Default: A Structural Estimation

Fang, Kim, and Li present a dynamic structural model of subprime adjustable-rate mortgage (ARM) borrowers making payment decisions, taking into account possible consequences of different degrees of delinquency from their lenders. The researchers empirically implement the model using unique data sets that contain information on borrowers' mortgage payment history, their broad balance sheets, and lender responses. The investigation of the factors that drive borrowers' decisions reveals that subprime ARMs are not all alike. For loans originated in 2004 and 2005, the interest rate resets associated with ARMs as well as the housing and labor market conditions were not as important in borrowers' delinquency decisions as in their decisions to pay off their loans. For loans originated in 2006, interest rate resets, housing price declines, and worsening labor market conditions all contributed importantly to their high delinquency rates. Counterfactual policy simulations reveal that even if the London Interbank Offered Rate (LIBOR) could be lowered to zero by aggressive traditional monetary policies, it would have a limited effect on reducing the delinquency rates. The authors find that automatic modification mortgages with cushions, under which the monthly payment or principal balance reductions are triggered only when housing price declines exceed a certain percentage, may result in a Pareto improvement, in that borrowers and lenders are both made better off than under the baseline, with lower delinquency and foreclosure rates. The researchers' counterfactual analysis also suggests that limited commitment power on the part of the lenders regarding loan modification policies may be an important reason for the relatively low rate of modifications observed during the housing crisis.

Sumit Agarwal and Changcheng Song, National University of Singapore, and Vincent Yao, Georgia State University

Banking Competition and Shrouded Attributes: Evidence from the U.S. Mortgage Market

Increased competition has a causal effect on banks' pricing strategies to compete for consumers and profits. Agarwal, Song, and Yao test this conjecture using an exogenous shock due to the interstate banking restriction that has been sequentially lifted across states since 1994. They find strong evidence that increased competition leads banks to reduce initial rates offered on the adjustable-rate mortgages (ARMs) to attract borrowers but increase interest rates after the rate reset and thereby exploit consumer inattention in the pricing terms. Different banks design pricing strategies that are optimal to their own profit structures. Consistent with theoretical predictions, the authors find that banks shroud more with naïve borrowers or less financially sophisticated borrowers, who are more subject to behavioral bias. Subsequently, banks earn more profits from lower default risk and delayed prepayments.

Wen-Chieh Wu, National Chengchi University, and Yu-Chun Ma and Jiann-Chyuan Wang, ChungHua Institute for Economic Research

Childhood Housing Environment and Young Adulthood Health Status

Wu, Ma, and Wang empirically investigate the lasting impact of childhood housing environment on self-rated health status in early adulthood. Using a group of Taiwanese young adults as study samples, the authors' Heckman two-stage estimation results find that housing crowdedness, housing type, and housing location are significant childhood housing environment variables influencing the self-rated health status in early adulthood. Young adults who resided in a crowded house at childhood have, on average, a higher self-rated health status than others. Moreover, young adults residing in apartments in childhood tend to have poorer self-rated health status than those residing in other types of housing. Lastly, young adults who grew up in urban areas have a better self-rated health status than others.

Brent Ambrose, N. Edward Coulson, and Jiro Yoshida, Pennsylvania State University

Inflation Rates Are Very Different When Housing Rents Are Accurately Measured

One of the largest components of official price indexes is housing services, which account for 16% to 41% of major price indexes in the United States. This paper demonstrates that the current measure of housing rents does not accurately track the actual inflation rate of housing rents. Ambrose, Coulson, and Yoshida propose to use an alternative quality-adjusted measure of housing rents that is based on a monthly statistic of landlord net rental income. Using their new rent indexes, the researchers show that the annualized quarterly rate of modified inflation was on average lower than the official rate by 1.4% to 3.4% during the Great Recession but higher by 0.3% to 0.7% during the current expansionary period after the recession. They further demonstrate significant impacts of their improved measurement of inflation rates on the cost of living adjustment to Social Security and real gross domestic product.

Daisuke Miyakawa, Hitotsubashi University; Chihiro Shimizu, National University of Singapore; and Iichiro Uesugi, Hitotsubashi University

Geography and Realty Prices: Evidence from International Transaction-Level Data

In this paper, Miyakawa, Shimizu, and Uesugi examine the role of the international flow of capital in real estate prices by quantifying the relation between investors' geographical locations and the prices they pay for their realty investments. The data set contains more than 30,000 realty investment transactions in Australia, Canada, France, Hong Kong, Japan, Netherlands, the United Kingdom, and the United States. First, the researchers find that foreign investors pay significantly higher prices than domestic investors do even after taking a wide variety of controls into account. Second, this overpricing becomes smaller as the buyers' exposure to realty investments in the host countries becomes higher. Third, in support of these results, the investment returns of foreign investors are systematically lower than those of domestic investors. This negative excess return becomes smaller as the buyers' exposure to the host countries becomes higher. These results indicate that the overpricing of foreign investors occurs when investors are less informed about the local property market and lessens with the accumulation of investment experience.

Sumit Agarwal, Cristian Badarinza, and Wenlan Qian, National University of Singapore

The Effectiveness of Housing Collateral Tightening Policy

Agarwal, Badarinza, and Qian show that macroprudential policies can lead to adverse selection in the market for residential mortgage loans. They exploit a unique loan-level data set and a policy experiment in Singapore that differentially targets mortgage contracts for second homes. For a horizon of up to one year after the policy roll-out, the researchers document a significant composition change towards a riskier type of borrowers that are twice as likely to become delinquent relative to a comparable non-treated cohort. Ex ante, these borrowers are not different in terms of observable characteristics, but they have lower behavioral credit scores and worse histories of credit card repayment. Consistent with the hypothesis of adverse selection towards a pool of more optimistic investors that fail to have a correct assessment of the policy impact and housing market growth, most of the effects appear to be driven by individual experiences of past price appreciation. Using a separate data set on bankruptcy proceedings, the researchers also document a higher probability of default in the market for investment properties, occurring immediately after the time of the policy change.

Benjamin J. Keys and Amit Seru, University of Chicago and NBER; Tomasz Piskorski, Columbia University and NBER; and Vincent Yao, Georgia State University

Mortgage Rates, Household Balance Sheets, and the Real Economy (NBER Working Paper No. 20561)

This paper investigates the impact of lower mortgage rates on household balance sheets and other economic outcomes during the housing crisis. Keys, Piskorski, Seru, and Yao use proprietary loan-level panel data matched to consumer credit records using borrowers' Social Security numbers, which allows for accurate measurement of the effects. Their main focus is on borrowers with agency loans, which constitute the vast majority of U.S. mortgage borrowers. Relying on variation in the timing of resets of adjustable rate mortgages, the researchers find that a sizable decline in mortgage payments ($150 per month on average) induces a significant drop in mortgage defaults, an increase in new financing of durable consumption (auto purchases) of more than 10% in relative terms, and an overall improvement in household credit standing. New financing of durable consumption by borrowers with lower housing wealth responds more to mortgage payment reduction relative to wealthier households. Credit-constrained households initially use more than 70% of the extra liquidity generated by mortgage rate reductions to repay credit card debt -- a deleveraging response that can significantly restrict the ability of monetary policy to stimulate these households' consumption. These findings also qualitatively hold in a sample of less-prevalent borrowers with private non-agency loans. The authors then use regional variation in mortgage contract types to explore the impact of lower mortgage rates on broader economic outcomes. Regions more exposed to mortgage rate declines saw a relatively faster recovery in house prices, increased durable (auto) consumption, and increased employment growth, with responses concentrated in the non-tradable sector. The researchers' findings have implications for the pass-through of monetary policy to the real economy through mortgage contracts and household balance sheets.

Sumit Agarwal, National University of Singapore; Gene Amromin, Federal Reserve Bank of Chicago; Souphala Chomsisengphet, Office of the Comptroller of the Currency; Tomasz Piskorski, Columbia University and NBER; Amit Seru, University of Chicago and NBER; and Vincent Yao, Georgia State University

Mortgage Refinancing, Consumer Spending, and Competition: Evidence from the Home Affordable Refinancing Program (NBER Working Paper No. 21512)

Agarwal, Amromin, Chomsisengphet, Piskorski, Seru, and Yao examine the ability of the government to impact mortgage refinancing activity and spur consumption by focusing on the Home Affordable Refinancing Program (HARP). The policy allowed intermediaries to refinance insufficiently collateralized mortgages by extending government credit guarantee on such loans. The researchers use proprietary loan-level panel data from a large market participant with refinancing history and social security number matched consumer credit records of each borrower. A difference-in-difference empirical design based on eligibility requirements of the program reveals a substantial increase in refinancing activity by the program: more than three million eligible borrowers with primarily fixed-rate mortgages – the predominant contract type in the U.S. – refinanced their loans under HARP. Borrowers received a reduction of around 140 basis points in interest rate, on average, due to HARP refinancing, amounting to about $3,500 in annual savings per borrower. There was a significant increase in the durable spending by borrowers after refinancing, with larger increase among more indebted borrowers. Regions more exposed to the program saw a relative increase in non-durable and durable consumer spending, a decline in foreclosure rates, and faster recovery in house prices. A variety of identification strategies reveal that competitive frictions in the refinancing market may have partly hampered the program's impact. On average, these frictions reduced take-up rate among eligible borrowers by 10%-20% and cut interest rate savings by 16-33 basis points, with larger effects among the most indebted borrowers who were the key target of the program. These findings have implications for future policy interventions, pass-through of monetary policy through household balance sheets, and design of the mortgage market.

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