AEI: A study in crony capitalism: Subprime lenders offered better deals to borrowers in districts of congressional big shots, May 6, 2013

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Keywords: Subprime, Crony Capitalism,

Abstract:

"Direct real estate is the largest asset class without readily available prices. The market capitalization is comparable to that of equities and fixed income, and much larger than that of other alternative asset classes like private equity or hedge funds. Nevertheless, because of the missing price information, it is difficult to estimate the market risk of direct real estate. We propose a simple methodology that uses data on indirect real estate to provide a better understanding of the real estate market risk. Our model uses widely available data and solves the problems posed by the appraisal and transaction-based indices, as well as by the hedonic approach, which are difficult to implement in practice. In particular, we use data on Real Estate Investment Trusts (REITs) returns, determine their factor exposures to other asset classes, and delever these exposures according to REITs’ balance sheets. We find that the existing direct indices understate real estate market risk. Indeed, using data from the UK, the volatility of the real estate asset class that our model entails is almost three times that of appraisal-based indices, and two times that of transaction-based ones. In addition, the correlations to other asset classes are materially different and higher, which is important in a portfolio context. We argue that these findings can have important empirical implications, as they can be useful for practitioners aiming at achieving a simple, transparent and more accurate risk management of their portfolios. Moreover, our findings can help to better understand extreme risks in the real estate market, which have a high impact on the overall economy, as was observed in the recent financial crisis." SSRN

Keywords: Public and Private Real Estate, Real Estate Risk

Keywords: Monetary Policy, Interest Rates, Housing Market, Housing Prices

Keywords: Rental Housing, Interest Rates

Keywords: Ireland, Ireland's Property Market

Keywords: US Real Estate Market, Home Ownership, Financial Crisis

..."We are witnesses and participants to a perfect storm of enormous and unstoppable trends triggered by the Internet, by Americans downsizing their lifestyles and increasing their savings, and of dynamic technology displacing capital intensive, asset-oriented investments. As a result of this sweeping sea change, we face a trillion dollar glut of commercial property threatening our communities, businesses, hundreds of small and mid-sized banks, as well as the FDIC."...

Keywords: Technological Change, Creative Destruction, US Real Estate

Abstract:

"We present 12 facts about the mortgage crisis. We argue that the facts refute the popular story that the crisis resulted from finance industry insiders deceiving uninformed mortgage borrowers and investors. Instead, we argue that borrowers and investors made decisions that were rational and logical given their ex post overly optimistic beliefs about house prices. We then show that neither institutional features of the mortgage market nor financial innovations are any more likely to explain those distorted beliefs than they are to explain the Dutch tulip bubble 400 years ago. Economists should acknowledge the limits of our understanding of asset price bubbles and design policies accordingly."


Keywords: Financial Crisis, Mortgage, Foreclosure, Asymmetric Information,