Isaac F. Megbolugbe

Spatial Dependence and House Price Index Construction

Accurate estimation of prevailing metropolitan housing prices is important for both business and research investigations of housing and mortgage markets. This is typically done by constructing quality-adjusted house price indices from hedonic price regressions for given metropolitan areas. A major limitation of currently available indices is their insensitivity to the geographic location of dwellings within the metropolitan area. Indices are constructed based on models that do not incorporate the underlying spatial structure in housing data sets. In this article, we argue that spatial structure, especially spatial dependence latent in housing data sets, will affect the precision and accuracy of resulting price estimates. We illustrate the importance of spatial dependence in both the specification and estimation of hedonic price models. Assessments are made on the importance of spatial dependence both on parameter estimates and on the accuracy of resulting indices.

A set of frameworks to aid the project manager in conceptualizing and implementing knowledge management initiatives

Abstract Over the years, researchers and practitioners have been concerned about the “collection” of information and knowledge. Now with Web-based and Intranet technologies, we have the “connectivity” to allow information and knowledge sharing to take place. In recent years, the term “knowledge management” has been proposed, and numerous individuals and organizations are trying to put more “science” behind the “art” of knowledge management. To help in this direction, this paper addresses some useful frameworks to help project managers and others in conceptualizing and implementing knowledge management initiatives. A generic knowledge management implementation framework is proposed. This paper should provide the building blocks necessary to further understand and develop knowledge management initiatives.

Housing Affordability: Myth or Reality?:

The editors of Urban Studies Review have cially as a means of wealth accumulation) charged the authors with providing a synand privatisation . This paper focuses prithesis of major trends/changes in the themarily on housing affordability. The auoretical and empirical investigation of the thors rely primarily on the US experience housing market as well as with exploring to articulate the affordability issue, but the impacts of public policy interventions draw examples of public policy intervenon urban housing markets . Over the next 3 tions more broadly from other developed years, the authors will write a series of countries . three articles on current housing research in developed countries to examine some of the key housing issues in the US and the UK, drawing upon supplementary examples from other countries . The primary focus of housing research in developed countries has changed dramatically over the last four decades . The agenda that preoccupied researchers during the 1950s was concentrated on the inadequate supply of housing and the poor quality of the existing stock . When the problem of housing supply was ameliorated in the 1960s, the research focus shifted to improving the quality of available housing. In the US, the focus changed again during the 1960s and 1970s as neighbourhood decay and racial segregation and discrimination became major research topics . The issue of discrimination was broadened in the 1980s to include such protected classes as persons with disabilities, families with children and the elderly. Over the last decade, however, housing research in developed countries has been dominated by three issues : housing affordability, home-ownership (espe-

An empirical analysis of property appraisal and mortgage redlining

The recent literature advances a hypothesis that addresses the possibility of mortgage redlining caused by a dynamic information externality in property appraisals and mortgage lending. In particular, Lang and Nakamura (1993) hypothesize that because property appraisals depend on past transactions, appraisals in neighborhoods where transactions were infrequent tend to be less precise. The greater uncertainty about house valuation in such neighborhoods can lead mortgage lenders to impose stringent requirements on borrowers. Lang and Nakamuras article, like most economic analysis of property appraisals, is theoretical. Using a sample of mortgages purchased by Fannie Mae, we present preliminary research results that cast doubt on appraisal behavioral rules such as weighted averages or backward-looking expectations on which Lang and Nakamura and other theoretical studies are based. Instead, our results refocus attention on the moral hazard issues of appraisal. We find that in more than 80 percent of the cases, the appraisal is between 0 and 5 percent above the transaction purchase price, in only 5 percent of the cases is the appraisal lower, and in 30 percent of the cases, the appraisal and transaction prices are identical. It would take a strong statistical model to generate such occurrences. Our resutls also indicate that appraisal outcomes are used as a risk factor with different weights for loans with different characteristics (loan-to-value ratios and house prices). The results suggest that more empirical investigation of appraisal practices be conducted to verify the validity of conventional wisdom embedded in theoretical studies, and we offer an econometric framework toward this end.

Appraisals, Transaction Incentives, and Smoothing

This article is structured around three principal objectives. The first is to determine whether any incentives for appraisals support an underlying purchase offer, which may be termed a transaction bias. Appraisals that are lower than purchase prices could involve additional cost for justification and thus undermine the transaction. The second objective is to test whether appraisal data are smoothed or exhibit less volatility than purchase data. The article compares the volatility of separate appraisal and purchase data. Given separate appraisal and purchase time series, the third objective is to derive the implied optimal appraisal updating rule.The model is applied to appraisal and purchase price indices for 3.7 million repeat transactions on mortgages bought by Fannie Mae and Freddie Mac by using monthly data from January 1975 to December 1993. The estimation procedure uses generalized autoregressive conditioned heteroskedastic (GARCH) analysis to take account of persistence in means and volatility in the house price time series. The article draws three principal conclusions. First, appraisals are systematically higher than purchase data, a first-moment differential. Second, appraisal smoothing does not occur generally. Third, the appraisal updating rule for the United States appears to involve error correction whereby underappraisals from pervious periods are eventually adjusted.

Understanding Neighbourhood Dynamics: A Review of the Contributions of William G. Grigsby

This paper summarises William G. Grigsbys contribution to our understanding of neighbourhood change. We discuss seven contributions among Grigsbys most-lasting. First, he staked out the boundaries of the still-nascent field very early in his career. Secondly, he situated the subject within the broader framework of metropolitan housing market dynamics. Thirdly, he developed a theoretical framework for investigating the subject that featured the analysis of housing sub-markets, the market process of neighbourhood succession, and residential segregation. Fourthly, he identified the economic, social, institutional and demographic forces that create neighbourhood change. Fifthly, he linked neighbourhood decline and deterioration to the spatial concentration of poverty. Sixthly, he underscored the significance of this understanding for formulating public policies to deal with deteriorated neighbourhoods. And seventhly, he provided a remarkably complete and robust framework for analysing neighbourhood change. This last-mentioned contribution is the culmination of his lifetime work and will prove perhaps to be his most significant. It provides a road map to future research on neighbourhood dynamics that others may wish to follow. It is very important to note that Grigsbys contributions are so foundational to the modern field of housing economics and housing policy that many of the first-generation analysts like John Kain, John Quigley, William Wheaton, Richard Muth and Anthony Downs do not bother to cite his works. Grigsbys contributions have become ingrained in the core of housing policy. The paper concludes by noting that Grigsby did not let the state of technology or the availability of data limit his vision. As a result, his ideas about neighbourhood change remain fresh and will remain important for years to come.

Racial and ethnic differences in housing demand: An econometric investigation

This article empirically investigates the sources of housing demand differences between racial (black and white) and ethnic (Hispanic and non-Hispanic) groups. We estimate the tenure-adjusted housing demand equations from the 1989 American Housing Survey (AHS) national sample data and measure the effects of different sources for demand disparities in housing demand, but much less so in explaining racial differences in housing demand. Specifically, 98% (96%) of the housing demand differences between Hispanic and non-Hispanic owners (renters) is due to differences in group endowments. For the racial groups, 29% (51%) of the housing demand differences between black and white owners (renters) is attributable to differences in group endowments. The residual differences explain 71% and 49% of the black-white differentials for owners and renters, respectively. The residual components in our model capture the effect of institutional and structural factors intrinsic to the housing market (such as racial discrimination or residential segregation) and/or the influence of important omitted or harder-tomeasure variables correlated with race or ethnicity (such as wealth, employment history, credit history, and cultural differences in housing consumption).

Residential‐Mortgage Lending Discrimination and Lender‐Risk‐Compensating Policies

The Boston Federal Reserve study (Munnell et al. 1996) concluded that illegal discrimination is a statistically significant contributor to the observed gap between white and minority residential-mortgage rejection rates. The Boston study speculated that discrimination arises because lenders do not equally apply risk compensation or mitigation policies for imperfect loans. Using the same 1990 Boston loan application data, our study specifically examines the relation between compensating policies and discrimination. Since compensating policies are encouraged by secondary-mortgage-market sale guidelines, we model both the lenders origination decision and its loan sale decision. Using a rule-based artificial-intelligence technique applied to each lender, we infer compensating policies (rules) that equally apply to all races and explain lending decisions. A minority-race indicator loses its statistical significance when an indicator of compensating-policy violations appears in the loan accept-reject equation. This result reflects the fact that the risk levels of marginal minority loans tend to be more extreme than those of marginal white loans. However, the result does not necessarily reject the existence of discrimination. Equally applied policies may be empirically indistinguishable from unfairly applied policies. In addition, equally applied policies may fail the adverse-impact doctrine if they do not serve a business necessity (such as profits). The industrys move away from discretionary, rule-based decisions to mortgage scoring answers the need for a decision framework that rigorously uses loan performance to evaluate all loan applicants fairly. Copyright American Real Estate and Urban Economics Association.

Mortgage Prepayment Float: Pricing and Risk Analysis

TYLER T. YANG is with Price Waterhouse. is article is a theoretical and empirical analysis of the value of mortgage servicers’ net prepayment float. Net prepayment float is the investment income on prepaid principal and interest prior to remittance to the ultimate mortgage note holder. Float income is potentially an important component of servicers’ overall profitability, but its value and risk cannot be estimated easily. We develop a pricing model of float and use it to empirically analyze the value and risk of float during a thirteen-year sample period. For a fee, a mortgage servicer performs the role of managing the mortgage payment process for an investor or the ultimate purchaser of the mortgage note. Servicing includes collection of monthly payments from borrowers, the transfer of principal and interest payments to investors, the management of escrow accounts, and the handhng of delinquencies and foreclosures.2 The servicing fee varies with the type of loan, but ranges between 25 and 50 basis points of the unpaid balance. Occasionally, servicers earn additional income from late fee charges assessed against delinquent borrowers. In addition, servicing provides a valuable customer base for loan and deposit products, insurance, and investment services that have the potential for materially influencing the returns and risks of mortgage lenders. In short, the value of the servicing contract is a significant component of the overall profitability of primary mortgage lenders, One aspect of that profit is the value of income received from the mortgage flow. The value and volatility of float income depends upon prepayments of the loan being serviced (see Rosenblatt [1994]). On the positive side, a servicer earns significant prepayment float income by investing

Housing Markets, Neighbourhood Dynamics and Societal Goals: National and International Policy Perspectives—Editors' Introduction

This special issue of Urban Studies is devoted to papers that were origina lly presented at a symposium held in September 1995 on the occasion of William G. Grigsby’ s retirement from the faculty of the University of Pennsylvania. The symposium was organised by the Wharton Real Estate Center and the Of® ce of Housing Research of the Federal National Mortgage Association. The participants were asked to develop papers stemming from their present work, while broadening their perspective to the national or international context. Global economic changes over the last decade and a half have necessitated a shift in housing and urban policies in many OECD countries towards a stronger market-oriented approach and a decreasing government role in housing and urban development. The same global competitive forces have resulted in labour market shifts in OECD countries, requiring innovative and more ̄ exible housing systems that adjust to labour requirements. In the short run, these changes have led to deepening urban poverty and greater isolation of urban poverty groups, not only in the US but also in other industrialised countries. These trends have serious repercussions, far beyond housing condition s, for the social organisation of urban areas. They have generated a new round of debates among policy-makers, private and non-governmental housing-sector players and housing scholars. Together with other urban scholars, Grigsby laid the foundation for our understanding of the dynamics of housing markets and the related residential and social isolation of urban lower-income and minority popula tions in the US. Grigsby’ s retirement, after his 40-year career of teaching and research, offered an opportune moment to organise a symposium that would bring together many of his former and present colleagues and students to revisit their joint work, expand on it by placing it in the context of urban policy experiences of industrial countries other than the US, and emerge with new insights relevant to present social and economic urban policy dilemmas. Apart from a paper by Louis Rosenberg which was earlier published in the Journal of Housing Studies , all the symposium papers are included in this issue. The papers can be grouped into three broad areas.