Karl E. Case

Comparing Wealth Effects: The Stock Market versus the Housing Market

We examine the link between increases in housing wealth, financial wealth, and consumer spending. We rely upon a panel of 14 countries observed annually for various periods during the past 25 years and a panel of U.S. states observed quarterly during the 1980s and 1990s. We impute the aggregate value of owner-occupied housing, the value of financial assets, and measures of aggregate consumption for each of the geographic units over time. We estimate regression models in levels, first differences and in error-correction form, relating consumption to income and wealth measures. We find a statistically significant and rather large effect of housing wealth upon household consumption.

Index-Based Futures and Options Markets in Real Estate

Most institutional and individual portfolios are very undiversified in real estate: many hold no real estate at all, many have holdings highly concentrated in certain regions or types of real estate. The risk of these concentrated holdings is not hedged. We propose here that cash-settled futures and options markets be opened on real estate to better allow diversification and hedging, and show that these markets solve problems that have hampered other real estate hedging media in the past. Related institutions, such as home equity insurance, might develop around the futures and options markets. The establishment of these markets is likely to increase the quantity of reproducible real estate, and lower rents on real estate. It may also reduce the amplitude of speculative real estate price movements and dampen the business cycle.

Housing price dynamics within a metropolitan area

This paper analyzes the pattern of house price appreciation in the Boston area from 1982 to 1994. The empirical results are consistent with the predictions of a standard urban model in which towns have a fixed set of amenities. The evidence suggests that changes in the cross-sectional pattern of house prices are related to differences in manufacturing employment, demographics, new construction, proximity to the downtown, and to aggregate school enrollments. These findings support the view that town amenities are not easily replicated or quickly adaptable to shifts in demand, even within a metropolitan area.

The Distribution of Fiscal Burdens and Benefits

This paper updates to 1968 levels earlier estimates of the distribution of tax burdens, expenditure benefits, and net burdens or benefits. Emphasis is on the methodological issues involved, including the role of incidence assumptions and the specific formulation of the question to be answered. The appropriate definition of the effective rate ratios and the resulting impact on distribution is shown to depend on whether the problem is formulated in absolute or in differential terms and on whether consideration is given to the introduction or the removal of the budget.

Property tax limits, local fiscal behavior, and property values: evidence from Massachusetts under Proposition

Abstract This paper examines the impact of a specific property tax limit, Proposition 2 1 2 in Massachusetts, on the fiscal behavior of cities and towns in Massachusetts and the capitalization of that behavior into property values. Proposition 2 1 2 places a cap on the effective property tax rate at 2.5% and limits nominal annual growth in property tax revenues to 2.5%, unless residents pass a referendum allowing a greater increase. The study analyzes the 1990–1994 period, a time when Massachusetts municipalities faced significant fiscal stress because of a 30% cut in real state aid and a demographically driven increase in school enrollments. The findings include the following: (1) Proposition 2 1 2 significantly constrained local spending in some communities, with most of its impact on school spending; (2) constrained communities realized gains in property values to the degree that they were able to increase school spending despite the limitation; and (3) changes in non-school spending had little impact on property values.

Wealth Effects Revisited: 1975-2012

We re-examine the link between changes in housing wealth, financial wealth, and consumer spending. We extend a panel of U.S. states observed quarterly during the seventeen-year period, 1982 through 1999, to the thirty-one year period, 1978 through 2009. Using techniques reported previously, we impute the aggregate value of owner-occupied housing, the value of financial assets, and measures of aggregate consumption for each of the geographic units over time. We estimate regression models in levels, first differences and in error-correction form, relating per capita consumption to per capita income and wealth. We find a statistically significant and rather large effect of housing wealth upon household consumption. This effect is consistently larger than the effect of stock market wealth upon consumption. This reinforces the conclusions reported in our previous analysis. In contrast to our previous analysis, however, we do find -- based on data which include the recent volatility in asset markets -- that the effects of declines in housing wealth in reducing consumption are at least as large as the effects of increases in housing wealth in increasing the course of household consumption.

How Housing Booms Unwind: Income Effects, Wealth Effects, and Feedbacks through Financial Markets

Abstract This paper considers dynamics in the reversal of booms in the housing market. We analyze three related mechanisms which govern the propagation of changes in the housing market throughout the rest of an advanced economy: wealth effects, income effects, and effects through financial markets. As the decade-long boom in the US housing market unwinds, we anticipate that there will be small wealth effects transmitted to the economy, but there will be large income effects affecting the rest of the economy and substantial financial market effects. If the current decline in housing starts and residential investment echoes the declines of the last three housing downturns, we estimate that gross national product (GNP) growth will be reduced by close to 3 per cent. Beyond the decline in housing investment, the recent turmoil in financial markets makes a recession induced by housing market conditions increasingly likely.

Investors, developers, and supply‐side subsidies: How much is enough?

Abstract This paper examines the recent history of supply‐side subsidies. The first section describes the programs that have had a major impact on the supply of low‐income housing over the last 20 years. The second section looks in some detail at the recent history of tax subsidies to low‐income housing and attempts to quantify their magnitudes. The third section presents some data on recent syndication deals to shed light on the return rate that seems to have been required in recent years to attract private investors into low‐income housing. The final section turns to the literature on rent‐seeking behavior and proposes a more efficient way to subsidize low‐income housing production.

Property Tax Incidence in a Multijurisdictional Neoclassical Model

This article presents a simple long-run multijurisdictional neoclassical model that is used to simulate the incidence of a residential property tax in a semi-open metropolitan area. Housing is produced using capital and land, and households consume housing and a composite good Capital and the composite are in perfectly elastic supply. In the model, a fixed number of households sort themselves across 25 jurisdictions. First, a uniform tax is imposed in all jurisdictions. Next, the tax is raised in one single jurisdiction. The excise effects of raising the tax turn out to be surprisingly large. In the long run, a 25% increase in the tax rate only generates 6.6% more revenue for the taxing jurisdiction. Explicit excess burdens are calculated using the indirect utility approach.

Property tax limits and local fiscal behavior: did Massachusetts cities and towns spend too little on town services under proposition 2 1/2?

This paper examines the impact of a specific local tax limit, Proposition 2* in Massachusetts, on the fiscal behavior of cities and towns in Massachusetts and the capitalization of that behavior into property values. Proposition 2* places a cap on the effective property tax rate at 2.5 percent and limits nominal annual growth in property tax revenues to 2.5 percent, unless residents pass a referendum (an override) allowing a greater increase. The study analyzes the 1990-94 period, a time when Massachusetts municipalities faced significant fiscal stress because of a 30 percent cut in real state aid and a demographically driven increase in school enrollments. The findings include the following: (1) Proposition 2* significantly constrained local spending in some communities; (2) constrained communities realized gains in property values to the degree that they were able to increase school spending despite the limitation; and (3) changes in school spending were a much stronger influence on house price changes than were changes in nonschool spending. These findings are confirmed using several different econometric approaches, including a two stage technique that directly estimates how close each community?s spending was to what it would have been in the absence of Proposition 2.