Brent C. Smith

If You Promise to Build It, Will They Come? The Interaction between Local Economic Development Policy and the Real Estate Market: Evidence from Tax Increment Finance Districts

The analysis in this article examines the impacts of one of the more prominent economic development tools, tax increment financing (TIF) districts, on the local commercial real estate market. The study area is the city of Chicago, a community with a long history of reliance on TIF districts as a means to foster local development initiatives. A treatment effects model is used to address the selection bias often attributed to studies of public policy impacts on real estate markets. The results indicate that commercial properties located within designated TIF districts exhibit higher rates of appreciation after the area is designated a qualifying TIF district.

Residential Mortgage Default: The Roles of House Price Volatility, Euphoria and the Borrower’s Put Option

House price volatility; lender and borrower perception of price trends, loan and property features; and the borrower’s put option are integrated in a model of residential mortgage default. These dimensions of the default problem have, to our knowledge, not previously been considered altogether within the same investigation framework. We rely on a sample of individual mortgage loans for twenty counties in Florida, over the period 2001 through 2008, third quarter, with housing price performance obtained from repeat sales analysis of individual transactions. The results from the analysis strongly confirm the significance of the borrower’s put as an operative factor in default. At the same time, the results provide convincing evidence that the experience in Florida is in part driven by lenders and purchasers exhibiting euphoric behavior such that in markets with higher price appreciation there is a willingness to accept recent prior performance as an indicator of future risk. This connection illustrates a familiar moral hazard in the housing market due to the limited information about future prices.

Vertical Inequity in Property Taxation: A Neighborhood Based Analysis

This paper applies a model to test for vertical inequity in property taxes using a set of residential sales from Bloomington, Indiana. The initial purpose is to compare results with those using the presently accepted regression approach as applied by Smith, B. C. (2000). (See Journal of Real Estate Research 19(3), 321–344, to the same data.) The new outcomes demonstrate there can be significant inequity in a jurisdiction that remains hidden under previous testing methods. Also, the new procedure generates multipliers to adjust for identified inequities. Findings imply that tests for value-related inequity in property tax assessment should be conducted using multiple spatial scales.

Housing Default: Theory Works and So Does Policy

Using a national loan level data set we examine loan default as explained by local demographic characteristics and state level legislation that regulates foreclosure procedures and predatory lending through a hierarchical linear model. We observe significant variation in the default rate across states, with lower default levels in states with higher temporal and financial costs to lenders when controlling for loan and location conditions. The results are notable given that many of the observed loans were sold to investors in national and international markets. State level legislative influences provide a foundation for discussion of national level policy that further regulates predatory lending and financial institution foreclosure activities.

Turmoil in the Residential Mortgage Market, a Review and Compilation of Research and Policy

Although the 30-year fixed rate loan is the standard in the U.S. mortgage market the interest rate risk is borne by holder of the note. This risk, and myriad other motivations fostered the development of the subprime and Alt-A instruments that together have become the bane of the housing market. Neither is likely to return as viable instruments, but the need for risk based pricing will return as the housing cycle returns. For this reason it is valuable to examine the academic research on unconventional loans as policy and future research advances.

Spatial Heterogeneity in Listing Duration: The Influence of Relative Location to Marketability

Research on the relevance of location in real estate markets has been limited in studies of time on market. A semi-parametric duration model, adjusted for groupwise heterogeneity and corrected for bias, is employed on residential data to examine marketing time till sold as a function of multiple spatial planes. Including both locally defined neighborhood proxies and absolute location signatures into the models allows for controlling the influence that location externalities have on the components of individual properties and their relationship to marketing time. The results indicate that the impact on marketability from characteristics on a specific property vary by location within a housing market. The results are consistent with the pricing literature, suggesting that prime locations can command price premiums and potentially result in reduced marketing time.

Tax Increment Finance Investment Impacts on Localized Real Estate: Evidence from Chicago’s Multifamily Markets

Indices for the Chicago multifamily real estate market are developed in order to examine the relationship between real property appreciation rates and proximity to a designated tax increment financing (TIF) district. Chicago is a community with a long history of TIF investment and a patchwork of more than 100 established TIF districts, comprising over 25 percent of the city’s total acreage and approximately 13.5 percent of the total tax base. Municipal governments across the country have come under increased pressure to provide quantifiable evidence that the tools they employ in the name of economic development have the potential to increase private investment. The central hypotheses assert that properties located within a designated TIF district will exhibit higher rates of appreciation after the area is designated a qualifying TIF district when compared to those properties selling outside TIF districts, and when compared to properties that sell within TIF district boundaries prior to designation.

Early Termination of Small Loans in the Multifamily Mortgage Market: Early Termination of Small Loans

This paper uses micro level data on small (as defined by Fannie Mae) multifamily loans in the Fannie Mae loan portfolio to examine recent prepayment and default performance. A multinomial logit model is specified and estimated for cross sectional and time series mortgage data. The results document the independent statistical significance of contemporaneous payment/income and loan/ value ratios and unemployment rates as well as more commonly studied determinants of default such as loan age and the original loan/value ratio. Prepayment is closely linked to the expiration date of prepayment penalties and yield maintenance provisions. However, such contractual provisions also tend to create increases in credit risk. When a balloon payment is required, a prepayment penalty provision expires, or a yield maintenance provision expires, the probability of default increases approximately 5 times. Anthony Pennington-Cross Marquette University Brent C Smith Virginia Commonwealth University

Build America Bonds: An Empirical Analysis of Characteristics and Issuer Benefits

We provide a comprehensive empirical analysis of the Build America Bonds (BABs) program. We show that the program benefits issuers in the form of lower yields relative to tax-exempt municipal debt for both general obligation and revenue issues. Our analysis suggests no differences in underwriter gross spreads for BABs issues at issuance relative to tax-exempt debt, and that issuance of BABs did not significantly affect prices of other tax-exempt bonds of the BABs issuers. Our analysis also examines characteristics of BABs issuers and factors influencing yields and gross spreads, and suggests that the BABs program was effective in achieving its objectives.

Competition and Risk Factors in Mortgage Lending: The Federal Housing Administration’s Evolving Role in the Primary Market

This paper presents an analysis of the distribution of home purchase mortgages insured by the Federal Housing Administration (FHA) in the primary mortgage market. Utilizing a sample of loan originations aggregated at the zip code level, the distribution of the market served by FHA and conventional lenders is compared across the State of Florida. Results indicate that FHA market shares are concentrated in zip codes with higher economic risk characteristics and obtained by high risk borrowers over the observation with evidence of market share contraction over the observation period. Unexpectedly, the analysis also reveals that FHA loan distribution fails to exhibit a targeted racial bias toward minority neighborhoods. One potential conclusion is that FHA was forced to accept lower quality loans as competition from more nimble private lenders with lower access hurdles and more rapid processing expanded into markets traditionally served by FHA.