Three Essays on Real Estate Finance

Abstract

This dissertation presents three essays on real estate finance.

In the first chapter, I test the hypothesis that anti-predatory lending laws inhibited the volume of mortgage lending during the recent housing-bubble period. I use cross-state variation in the timing of law adoptions and the strictness of the laws in a fixed-effect model to estimate the impact of these laws on mortgage volume. Consistent with my hypothesis, I find that states with stricter laws had lower mortgage volume. I also find a larger reduction of mortgage volume in loans with a high Loan-to-Income ratio. I test whether, by restricting mortgage volume, these laws impacted household expenditures and find some weak evidence that the laws reduced household expenditures.

In the second chapter, co-authored with Harrison Hong and Jose Scheinkman, we develop a speculation-based theory of home improvements. Housing services are produced from a mix of land and structures. Homeowners have an option to increase their structures (i.e. make improvements) holding fixed their land. Speculative improvements arise because overconfident homeowners mistakenly believe they can add to structures for a lower cost than a competitive construction industry. Improvements are increasing and convex in home prices. There is excessive home remodeling in equilibrium. And the change in the recoup ratio (the ratio of resale value of improvements to construction costs) is negatively correlated with construction cost growth controlling for home price appreciation. We provide evidence consistent with our theory using data on the costs and recoup values of remodeling projects across U.S. cities.

In the third chapter, I test the pure consumption-motive remodeling which tends to lead to negative relationship between remodeling expenditures and the recoup ratio. I find that remodeling expenditures are not significantly associated with the remodeling recoup ratio, which rejects the null hypothesis. This indicates that investment-motive remodeling is also an important part of remodeling activities. I also find that home price appreciation, the availability of mortgage credit for remodeling, per capita income, and housing supply elasticity are significant determinants for home improvements.