Eli Beracha

Lessons from Over 30 Years of Buy versus Rent Decisions: Is the American Dream Always Wise?

Homeownership is touted as the “American Dream.” It is credited with enhancing wealth; increasing civic pride; and improving self‐esteem, crime prevention, child development and educational outcomes, among other benefits. This article does not dispute any of these claims. Instead, this study hypothesizes that crowding toward homeownership raises the price of homes above their fundamental value resulting in the purchase of a home becoming a contraindicative action. After setting the holding period to the average Americans tenure in a residence, renting (not buying) proves to be the superior investment strategy over most of the study period.

When Will Housing Recover

An interesting perspective on recent trends in the U.S. housing market is gained by noting how housing prices correspond to per capita income, a traditional measure of affordability. The ratio of housing prices to per capita income is high but close to historical norms in many regional markets. However, notable exceptions do exist. In California, housing prices recently reached levels relative to per capita income far above historical norms. A significant pricing correction has begun in that market. Similarly, housing prices are correcting sharply in Arizona, Florida, and Nevada. Investors need to be mindful of the potential for housing market–related losses and the potential for contagion among asset classes. See comments and response on this article. Falling real prices for housing are unusual in the United States; falling nominal housing prices are unprecedented, at least since the Great Depression of the 1930s. Yet, although complete figures for 2008 are not yet available, we can see that the nation is undergoing an extraordinary decline in both real and nominal housing prices. On a national basis, nominal prices for housing declined by an unprecedented –8.0 percent between Q2:2006 and Q2:2008 (the latest available data). Over this period, regional housing markets were especially weak in California (–27.3 percent), Nevada (–28.6 percent), Arizona (–24.8 percent), Florida (–27.0 percent), and Virginia (–19.4 percent). Concern with problems in the California housing market is at the epicenter of the current crisis because California is the largest regional housing market, is presently experiencing a fast rate of price depreciation, and was a pivotal state in the tightly contested 2008 presidential election. We show that the sample of 10 metropolitan statistical areas used in 1987 to constitute the original S&P/Case–Shiller Composite 10 Index—the most widely followed housing price index—is dominated by what turned out to be seven red-hot and then stone-cold regional housing markets, including California, Florida, Nevada, New York, and the District of Columbia. In these markets, prices soared up to a market peak in Q4:2006 and then began a collapse that continues through Q2:2008. At the same time, housing markets remain stable throughout much of the United States. Moreover, despite the severe correction in a handful of high-profile markets, housing prices have continued to rise in 23 states. In another 11 states, the recent decline in housing prices is a modest 0–5 percent. The current and unprecedented nationwide decline in housing prices has had little to no effect on homeowners in 34 of 50 states—that is, in roughly two-thirds of the states. For the United States as a whole, housing prices will conform to long-term norms if, in an environment of flat housing prices and continued low interest rates, typical per capita income growth ensues for only 1.20 years. In this case, the nationwide housing “crisis” will be on the road to recovery by the first quarter of 2010.

On the Relation between Local Amenities and House Price Dynamics

This study explores the extent to which local amenities (quality of life and trade-productivity) are related to house price volatility, returns, and risk-adjusted returns across 238 MSAs from 1975 to 2013. We find strong and unambiguous evidence that high amenity areas experience greater price volatility. In regards to returns, high amenity areas experience greater (lower) real returns in appreciating (depreciating) markets. However, high amenity areas experience little to no abnormal risk-adjusted returns, on average. Results from the study are robust to an endogenous treatment of amenities and land supply elasticity within a GMM framework. Overall, we conclude that the desirability of a metropolitan area from the perspective of both homeowners and firms is a significant channel through which land values drive house price dynamics.

Are High-Cap-Rate Properties Better Investments?

In this article, the authors explore whether properties with higher cap rates have better investment performance than those with low cap rates. Using market-adjusted cap rates to classify individual properties, they find evidence of a strong value effect in real estate: High-cap-rate properties exhibit higher returns, outperform on a risk-adjusted basis, and should be preferred by investors. The value effect is consistent across property types, persistent over the cycle, statistically significant, and very large in economic terms. Although the underlying dynamics vary somewhat across property types (especially apartments), the better performance of high-cap-rate (i.e., value) properties appears nearly ubiquitous.

The Capitalization of School Quality into Renter and Owner Housing

Residential property amenities including school quality should be capitalized into both rent and property sale prices. Evidence of price and rent premiums for higher school quality is provided. The price premium for school quality for owners exceeds the premium for renters. The premiums paid by renters and owners vary with the likelihood the household directly uses school services, housing market conditions, whether the property is in an urban or suburban area and by the observed school quality in the years leading to the transaction. The larger price premium paid by owners is supported by enhanced liquidity and tempered price volatility for properties located in quality school districts.

The 4% rule: Does real estate make a difference?

Abstract This paper examines the wealth maximisation and preservation effects of including commercial real estate in retirement-phase portfolio management. Prior research addresses the role of real estate during the wealth-accumulation phase of the investor lifecycle; however, little is known about the contribution of real estate during the invest-and-spend, or decumulation, phase. To address this issue, we estimate short-fall risk based on the widely known 4% Rule. We use pricing data for multiple asset classes and simulation techniques, combined with a robust correlation structure, to examine: short-fall risk sensitivity to alternative spending rules; the impact of public vs. private real estate allocations; wealth preservation as an investment objective; and the effect of real estate on upside, or wealth maximisation, potential. We find short-fall risk in a decumulation portfolio decreases with substantial allocations to real estate. This result holds for a portfolio including either public or private real estate. Additionally, and under most conditions, the best performing decumulation-phase portfolios include a real estate allocation with both public and private real estate exposure. These results have significant implications for investors, whether they be retirees, plan administrators or endowments, as well as financial economists studying the lifecycle of investment decisions.