Research

Published and Accepted Papers:

Reference Points Spillovers: Micro-Level Evidence from Real Estate, Review of Financial Studies, Accepted

with Christopher A. Parsons

Homeowners who originally bought when market-wide price levels were high (low) fetch high (low) sales prices and rents, even decades later. We study the propagation of such reference-dependence to neighboring listings. The “spillover” reference-point effect is about one-half as large as the “own” reference-point effect. Neither house quality nor location appears capable of explaining the result. Using a simple model to provide empirical predictions, we find support for a competition-based mechanism. We quantify the aggregate effect of own and spillover reference point effects on aggregate prices and/or rents at the zip code level.

Local Experiences, Search, and Spillovers in the Housing Market, Journal of Finance, Forthcoming

with Antonio Gargano and Elvis Jarnecic

Recent local price growth explains differences in search behavior across prospective homebuyers. Those experiencing higher growth in their postcode of residence search more broadly across locations and house characteristics, without changing attention devoted to individual sales listings, and have shorter search duration. Effects are stronger for homeowners, in particular those living in less wealthy areas and looking for a new primary residence. We use a quantitative equilibrium model and reduced-form analysis to show that the expansion of search breadth translates into widespread spillovers onto house sales prices and inventories of listings across postcodes within a metropolitan area.

Peak-Bust Rental Spreads, Journal of Financial Economics, 2022, Volume 143(1), pages 504-526

with Christopher A. Parsons

Landlords appear to use stale information when setting rents. Among over 43,000 California rental houses in 2018-2019, those last purchased during 2005-2007 (the peak) rent for 2-3% more than those purchased during 2008-2010 (bust). Neither house nor landlord characteristics explain this “peak-bust rental spread.” To clarify the mechanism, we test cross-sectional predictions from a simple theory of rent-setting. We find empirical support for both anchoring and prospect theory. In the first, past sales prices distort landlords’ current estimates of house values/rents. In the second, monthly payments establish (recurring) reference points, against which gains or losses are measured.

Idiosyncratic Risk in Housing Markets, Review of Financial Studies, 2021, Volume 34(8), pages 3695-3741

This paper studies the idiosyncratic risk component of individual house capital gains, using data on resales and intermediate capital investments. The idiosyncratic component is large, its dynamics do not follow a random walk, and its magnitude is associated with proxies of information quality and market liquidity at the level of individual properties. Accounting for idiosyncratic risk substantially changes the assessment of the risk-return trade-off for housing, reducing Sharpe ratios and making them holding period-dependent. I use a simple quantitative portfolio model to show that homeowners may be willing to make significant payments to insure against idiosyncratic housing risk. 

Learning from Disagreement in the U.S. Treasury Bond Market, Journal of Finance, 2021, Volume 76(1), pages 395-441 

with Kristoffer Laursen and Kenneth J. Singleton

We study risk premiums in the US Treasury bond market from the perspective of a Bayesian econometrician RA who learns in real-time from disagreement among investors about future bond yields. Notably, disagreement has substantial predictive power for yields,  and RA's risk premiums are less volatile than those in the analogous model without learning.  RA's forecasts are substantially more accurate than the consensus forecasts of market professionals, particularly following U.S. recessions. The predictive power of disagreement is distinct from the (much weaker) forecasting power of inflation and output growth. Rather, it appears to reflect uncertainty about future fiscal policy.

Working Papers:

Cooling Auction Fever: Evidence from the Housing Market

with Antonio Gargano

This paper presents novel evidence of the effects of bidders’ behavioral biases, and sellers’ strategic responses, on the outcome of high-stakes auctions. It also provides evidence of how policies improving the information environment, and limiting the ability of sellers to exploit bidders’ biases, can be used to cool booming markets. We take advantage of the introduction of laws deterring “underquoting” in real estate auctions. Underquoting is the practice of advertising downward-biased listing prices. This practice is used by real estate agents and sellers to convey distorted signals on sellers’ reservation values, and to increase the number of auction participants. The introduction of the laws leads to higher listing prices, reducing the bias between listing prices and market valuations by 60%, and to a relative drop in auction sales prices between 2% and 6%. Our findings are not consistent with the predictions of rational models, since underquoting only increases participation by low valuation bidders. However, they are consistent with models in which higher auction participation induces overbidding through behavioral channels.

Using High-Frequency Evaluations to Estimate Discrimination: Evidence from Mortgage Loan Officers

with Rawley Z. Heimer and Edison G. Yu

WRDS Best Paper in Financial Intermediation, MFA 2021

R&R at the Review of Financial Studies

We develop empirical tests for discrimination that use high-frequency evaluations to address the problem of unobserved heterogeneity in a conventional benchmarking test. Our approach to identifying discrimination requires two conditions: (1) the subject pool is time-invariant in a short time horizon and (2) there is high-frequency variation in the extent to which evaluators can rely on their subjective assessments. We bring our approach to the residential mortgage market, using data on the near-universe of U.S. mortgage applications from 1994 to 2018. Monthly volume quotas reduce how much subjectivity loan officers apply to loans they process at the end of the month. As a result, the volume of new originations increases by 150% at the end of the month, while application volume and applicants’ quality are constant within the month. Owing to within-month variation in loan officers’ subjectivity, we estimate that Black mortgage applicants have 3.5% to 5% lower approval rates, which explains at least half of the observed approval gap for Blacks. When we use this approach to evaluate policies, we find that market concentration and FinTech lending have had no effect on lending discrimination, but that shadow banking has reduced discrimination presumably by having a larger presence in under-served communities.

Robbing Peter to Pay Paul? The Redistribution of Wealth Caused by Rent Control

with Kenneth R. Ahern

We use the price effects caused by the passage of rent control in St. Paul, Minnesota in 2021, to study the transfer of wealth across income groups.  First, we find that rent control caused property values to fall by 6--7%, for an aggregate loss of $1.6 billion.  Both owner-occupied and rental properties lost value, but the losses were larger for rental properties, and in neighborhoods with a higher concentration of rentals.  Second, leveraging administrative parcel-level data, we find that the tenants who gained the most from rent control had higher incomes and were more likely to be white, while the owners who lost the most had lower incomes and were more likely to be minorities.  For properties with high-income owners and low-income tenants, the transfer of wealth was close to zero.  Thus, to the extent that rent control is intended to transfer wealth from high-income to low-income households, the realized impact of the law was the opposite of its intention.

Individual Investors' Housing Income and Interest Rates Fluctuations

with Antonio Gargano

CFP Board 2022 ARC Best Paper Award

Little is known about the participation of small individual landlords in the rental market, and about rental income earned by households. Using unique tax filings data from Australia, we show that 20% of middle and retirement age median-income individuals are landlords. This fraction has risen over the last 20 years, increasing by 80% for the retirement age group. We provide evidence linking this change to cuts in interest rates, which have led older individuals to substitute interest income with rental income. Higher participation in the rental market rises individuals’ exposure to local shocks, increases house prices, and lowers rental yields.

The FOMC Cycle and Consumer Decision Making: Evidence from the Residential Housing Market

with Rodney Ramcharan and Edison G. Yu

Monetary policy works through financial markets to affect real consumer decisions. Buying a home is one of the most important consumer decisions, and we study the impact of the FOMC cycle on the timing and cost of mortgage applications. We find that the FOMC cycle is a focal point of attention for some consumers, driving an increase in the demand for mortgage credit ahead of these meetings. This bunching is more concentrated among the financially literate and when monetary policy uncertainty is high. It also leads to an increase in the cost of mortgage credit ahead of FOMC meetings.

The Risk Adjusted Performance of Asset Flippers 

with Victor Westrupp

Using data from the housing market of Los Angeles County, we show that experienced asset flippers earn sizable abnormal performance with respect to both investments in the U.S. stock market and in a passive mutual fund tracking a representative U.S. REIT index. Abnormal performance is positive even after adjusting returns for a conservative estimate of the additional compensation for the specific risks of local real estate investment activities. Experienced flippers outperform their inexperienced competitors when trading comparable houses over the same time frame, but face decreasing returns to the scale of their asset portfolios.  (an older version of the paper was circulated under the title: Residential Real Estate Traders: Returns, Risk, and Strategies)