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, whether in commercial real estate, residential real estate, banking or the macroeconomy.
The Fitzgerald Institute for Real Estate supports theoretical, empirical, and experimental research in real estate investment and capital markets, with an emphasis on multidisciplinary scholarship and data-informed decision-making.
Analyzing Buy-to-Rent Investors and the Market for Single Family Homes
Schultz published "Buy-to-Rent Investors and the Market for Single Family Homes" (with Visiting Professor 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.
Assessing 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.
Calculating the Effect of the Foreign Buyers Tax on Real Estate Pricing
Prof. Raiha's working paper uses an innovative research strategy to address the question: "Does the Foreign Buyers Tax Reduce Foreign Demand? Evidence from Superstitious Beliefs in Real Estate Pricing." (with Lu Han).
AbstractThis paper analyzes the effects of the recent Ontario Non-Resident Speculation Tax (NRST) on housing markets, using the transaction-level data for the Greater Toronto Area. Despite the popular belief that the inflow of Chinese investors has been partly responsible for the recent rapid house price growth, evaluating the effectiveness of the NRST is challenging for two reasons. First, buyer nationality is difficult to observe. Second, the implementation of the NRST coincided with a number of other policies targeted at the housing market. To address these challenges, we propose a behavioral approach to infer the policy’s impact on foreign housing demand from estimating how culture-dependent numerological superstition affects home purchase decisions differently before and after the policy. Our results indicate that superstition bias enters real estate pricing and that such bias is culture dependent. While Chinese buyers may view 8 as lucky and 4 as unlucky, others may view 13 as unlucky. Consistent with this, we find that for hedonically identical homes, there is a premium associated with addresses containing “8”s and a discount associated with addresses containing “4”s in Chinese neighborhoods; in contrast, there is always a discount associated with addresses containing “13”s across the GTA. Further, the discount for unlucky addresses is substantially larger than the premium for lucky ones, consistent with theories of loss aversion. Finally, we find that the implementation of the NRST substantially reduced the discount associated with unlucky “4”s but had no effect on the discount associated with unlucky “13”s, indicating that the NRST dampens the demand mostly from Chinese investors. This result is stronger in condominium markets than in house markets, possibly due to the fact that the former is treated as an easier investment vehicle for foreigners. Further tests suggest that our conclusions are unlikely to be driven by endogeneity.
Comparing the Effects of Monetary and Fiscal Policy During the Great Recession Versus COVID-19
Prof. Sims published "Wall Street QE vs. Main Street Lending" (with Dario Cardamone & Jing Cynthia Wu) in the European Economic Review (2023).
Monetary and fiscal authorities reacted swiftly to the COVID-19 pandemic by purchasing assets (or “Wall Street QE”) and lending directly to non-financial firms (or “Main Street Lending”). Our paper develops a new framework to compare and contrast these different policies. For the Great Recession, characterized by impaired balance sheets of financial intermediaries, Main Street Lending and Wall Street QE are perfect substitutes and both stimulate aggregate demand. In contrast, for the COVID-19 recession, where non-financial firms faced significant cash flow shortages, Wall Street QE is almost completely ineffective, whereas Main Street Lending can be highly stimulative.
Evaluating Investor Characteristics in Residential Real Estate Invesments
Schultz published "Residential Real Estate Investments and Investor Characteristics" (with Visiting Professor Walter D'Lima) (2021) in The Journal of Real Estate Finance and Economics.
We investigate the returns to individuals who invested in residential real estate over 1999–2015. Using purchase and sales prices, we measure returns on properties that were both bought and sold by an investor using annualized price appreciation. We find that investors outperform market indices. Real estate investors earn larger returns if they live near the investment property, buy without a mortgage, and have experience in real estate investing. These characteristics are associated with investors paying less, as a percentage of the assessed value, for the property. Investors earn smaller returns on houses that they live in than on other property. Since appreciation reflects expenditures on improvements, we study land and mobile home investments where returns are less likely to be affected by improvements and document similar results. Overall, we highlight the risk and returns of residential real estate investments by retail investors. In addition, this paper sheds light on the role of investors in the residential market.
Exploring the Strategic Location of Investment
Davin Raiha published "Economic Influence Activities and the Strategic Location of Investment" (with John M. de Figueiredo) in Business and Politics (Cambridge University Press 2022).
AbstractThis article examines the economic influence activities (EIAs) of firms. We argue that firms invest in jobs and establishments in districts of congressional committee members that have oversight over their businesses and industries. This investment increases as legislators’ power rises in Congress. Our theory makes three predictions. First, EIAs by firms will be higher in congressional districts where the legislators have substantial political influence over the firm, relative to districts where legislators have little influence over the firm. Second, EIAs will increase with the legislators’ power on the focal committee. Third, when a legislator exits the committee, EIAs will diminish, but previous investments in the district will remain. We test these predictions by analyzing the Trinet census of establishments, mapped into the committee structure of the US Congress, by tracking the investment and employment of firms in each industry in each congressional district over time. Using fixed-effects models, we show the predictions of the theory find substantial support in the US Senate but not the House. We explore causality by using exogenous exits of politicians by death and scandals to further complement our analysis, and discuss why EIAs may be less likely to occur and detect in the House.
Studying the Consequences of Transparency in Mortgage-Backed Securities Markets
Schultz published "Transparency and dealer networks: Evidence from the initiation of post-trade reporting in the mortgage backed security market" (with Zhaogang Song) (2019) 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.
Understanding the Importance of Documentation in the Design of Mortgage-Backed Securities
Echeverry 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.