Patrick S. Smith
Working Papers:
"The Effect of Mortgage Securitization on Asset Liquidation Decisions" with Anurag Mehrotra and Adam Nowak [SSRN]
Abstract: Liquidation via either a short sale or real estate owned (REO) transaction was the most likely outcome for delinquent residential mortgages stemming from the 2007-2009 financial crisis. Although short sale liquidations benefit mortgage-backed security (MBS) investors, securitized loan servicers have a financial incentive to pursue REO liquidations. We show this agency conflict not only adversely affects MBS investors but also the real economy via direct spillover effects on nearby homeowners’ subsequent default behavior. Our findings highlight the importance of the asset liquidation channel in preventing future price-default spirals in housing markets.
"Adverse Selection in Mortgage Markets: Evidence from Ginnie Mae Early Buyouts" with Arka Bandyopadhyay and Dongshin Kim [SSRN]
Abstract: This paper provides new evidence of agency conflicts in securitization by documenting adverse selection in Ginnie Mae issuers' early buyout activity. Conditioning on delinquency, we find issuers buy out less risky loans with higher interest rate spreads. We illustrate not only how information asymmetries arise during the loan servicing process but also how issuers exploit them in their early buyout decisions. Unlike prior studies examining information asymmetries introduced by the securitization process, we employ unique data on a subset of early buyout loans that directly observes the soft information collected by issuers.
"School Quality as a Catalyst for Bidding Wars and New Housing Development" with Crocker Liu [SSRN]
Abstract: We exploit shocks to school quality arising from the continuous, unexpected redistricting of school attendance boundaries in Atlanta, Georgia to provide new evidence on demand for better schools as manifested in bidding wars and changes to the built environment. Using repeat sales before and after a redistricting, we find houses redistricted to higher (lower) quality schools are more (less) likely to be involved in a market-driven bidding war. Similarly, undeveloped, redistricted parcels that receive a positive (negative) school quality shock are more (less) likely to be developed. School quality shocks also have a causal effect on house prices and time-on-market.
"Fire Sale Discounts and Externalities in Housing Markets" with Anurag Mehrotra and Adam Nowak [Coming Soon]
Abstract: We provide a data-driven text analysis framework to decompose house quality from the urgency of the sale when estimating fire sale discounts in housing markets. Our framework controls for not only the quality of the foreclosed house but also the relative degree to which it differs from nearby non-distressed houses. After controlling for house quality, we find no evidence of foreclosure price spillovers stemming from a supply effect or disamenity effect. Instead, we show foreclosures disincentivize nearby homeowners from investing in their houses.
Works in Progress:
"Audio Context: The Informational Content of Verbal Communication" with Adam Nowak and Yaoyi Xi
"Unequal Access to Housing" with Adam Nowak
"Using Housing Transaction Data to Inform Public Policy: A Word of Caution" with Adam Nowak
"Using Non-financial Incentives to Attract and Retain Teachers: Evidence from a Four-Day School Week in Colorado" with Adam Nowak and Frank Perrone
Recent Publications:
"Quality-adjusted House Price Indexes" with Adam Nowak (AER: Insights) [AER:I Version] [SSRN Version]
Abstract: The constant-quality assumption in repeat-sales house price indexes (HPIs) introduces a significant time-varying attribute bias. The direction, magnitude, and source of the bias varies throughout the market cycle and across metropolitan statistical areas (MSAs). We mitigate the bias using a data-driven textual analysis approach that identifies and includes salient text from real estate agent remarks in the repeat-sales estimation. Absent the text, MSA-level HPIs are biased downwards by as much as 7% during the financial crisis and upwards by as much as 20% after the crisis. The geographic concentration of the bias magnifies its effect on local HPIs.
"Real Estate Dictionaries Across Space and Time" with Adam Nowak and Brad Price (JREFE) [JREFE Version]
Abstract: Leveraging high-dimensional variable selection methods, we show the textual information provided in real estate agents’ remarks about a property can be used to address spatial and temporal heterogeneity in housing markets. Including the textual information in the pricing model decreases in-sample prediction errors by as much as 18.7% at the MSA level and 39.1% at the zip code level. These results are robust to transforming the raw text using a real estate specific word list, the choice of n-grams, word stemming, and heteroscedasticity in the hedonic and repeat-sales models. These findings suggest the raw text in the remarks can be included directly in predictive pricing models.
Adam created a user-friendly R package for performing text analysis using Real Estate data [realEstateDictionaries R Package]
You can also download an updated version of the word lists we used in the paper [Download RE Word Lists]
"Asymmetric or Incomplete Information about Asset Values?" with Crocker Liu and Adam Nowak (RFS) [RFS Version] [SSRN Version]
Abstract: We provide a new framework for using text as data in empirical models. The framework identifies salient information in unstructured text that can control for multidimensional heterogeneity among assets. We demonstrate the efficacy of the framework by re-examining principal-agent problems in residential real estate markets. We show that the agent-owned premiums reported in the extant literature dissipate when the salient textual information is included. The results suggest the previously reported agent-owned premiums suffer from an omitted variable bias, which prior studies incorrectly ascribe to market distortions associated with asymmetric information.