Investment & Markets
Real estate is the world's largest asset class
The financial crisis of 2008 reaffirmed the importance of real estate and its impact on the global economy. According to one study, the cost of the financial crisis to the U.S. economy alone exceeded $22 trillion. Millions of Americans lost their jobs, their savings, and their homes.
Understanding real estate investment and capital markets is critical for our economy and our communities. Investments and markets in real estate, coupled with sound public policy, promote economic growth and help to prevent future crises.
The Fitzgerald Institute for Real Estate supports theoretical, empirical, and experimental research in real estate investment and capital markets, with an emphasis on interdisciplinary scholarship and data-informed decision-making.
Analyzing Buy-to-Rent Investors and the Market for Single Family Homes
Schultz recently published "Buy-to-Rent Investors and the Market for Single Family Homes" (with Walter D'Lima) in the Journal of Real Estate Finance and Economics (2020).
We examine the impact of house purchases by large buy-to-rent investors on local real estate markets. First, we present micro-level evidence of positive externalities from institutional entry. We show that returns on repeat sales of properties near purchases by buy-to-rent investors are significantly greater if the repeat sale concluded after the buy-to-rent purchase rather than before. Secondly, we highlight the potential channel underlying such an externality as a supply side effect. Specifically, we show that properties outside the price range normally paid by buy-to-rent investors experienced smaller gains after nearby buy-to-rent purchases. Thus, buy-to-rent investors appear to increase the value of properties in an area by reducing the local supply. Lastly, we document mortgage market effects due to institutional purchases and related supply effects. We show that mortgage use increased after the buy-to-rent purchases of nearby properties and that the increase arises from existing lenders that operate in the market rather than new lenders entering the market.
Evaluating the Consequences of Transparency in Mortgage-Backed Securities Markets
Schultz recently published "Transparency and dealer networks: Evidence from the initiation of post-trade reporting in the mortgage backed security market" (with Zhaogang Song) in the Journal of Financial Economics.
We examine the introduction of mandatory post-trade reporting in the To-Be-Announced mortgage-backed securities market. With post-trade reporting, trading costs fell for institutional investors. Trading costs declined more for investors’ trades with peripheral dealers than for their trades with core dealers. Peripheral dealers’ market share dropped after the introduction of post-trade reporting, suggesting that opacity was protecting inefficient high-cost dealers. Interdealer trades and volume declined as transparency made it easier to find natural counterparties. Relationships between dealers became less important and, after controlling for the number of trades, dealers used more counterparties in interdealer trades.
Measuring the Performance of Investment Managers with Active Commercial Real Estate Portfolios
Using a holdings-based measure of active management termed the Segment Active Share, this article demonstrates the outperformance of more active commercial real estate portfolios; i.e., those with segment weights least like the index. Employing proprietary IPD data for 256 U.K. real estate funds over the period 2002–2011, we find that funds with high Segment Active Share on average outperformed the real estate market by 1.9% per year. These funds do not seem to take increased risk, and their outperformance cannot be explained by fund size alone, though on average they are smaller funds.
Understanding the Importance of Documentation in the Design of Mortgage-Backed Securities
Echeverry recently posted a working paper on "Information Frictions and Mortgage-Backed Security Design: Lack of Sophistication or Opaque Assets?"
Investors in residential mortgage-backed securities have information about the probability that the bond’s rating is downgraded, and this is reflected in the security design. In general, a higher level of subordination is predictive of a lower likelihood of downgrade. However, this information content is affected by two possible frictions. Using documentation quality on private label mortgages to measure opacity of a security, I show that opaque deals exhibit less information content. Once opacity is taken into account, the traditional measure of investor sophistication is not the main driver of information content. More precisely, subordination percentages of junior tranches are no more informative than those of AAA tranches within “low-doc” deals, while the latter are no less informative within “full-doc” deals.