RE 420
The basic demand curve for real estate suggests that as rents decline, the amount of space leased increases. How does this differ from the demand growth that occurs in an office market when there is significant job growth in a market?
- The former is moving along the demand curve, reflecting the trade-off between quantity and rent at any given level of demand (# of employees) - The latter reflects a shift in the overall demand curve to the right, that is, higher quantity occupied at any given level of rents, or, higher rents at any given quantity of supply.
what are the spillover effects of the collapse in house prices?
-A failing construction sector - The startling rise in foreclosures - Higher unemployment
what is an explanation to the high unemployment during the great recession?
-Skills mismatch: Workers need to be retrained to work in other professions that are hiring -Delayed foreclosures and government assistance reduced the incentive of workers to find jobs during the Great Recession
which friction during the Great Recession worked against the economy correcting itself
-The zero lower bound on nominal interest rates. -People did not move to counties with a stronger job market - Wages did not lower.
What would be the 'short-term' effect of an increase in demand for space usage on the following factors? 1) Rent ... 2) Price of real estate assets ... 3) New development ...
1) Rent goes up 2) Price of real estate assets goes up 3) New development increases
Suppose a home owner has 20 percent equity in a home worth $100,000. If house prices fall 20%, what is the percent decline in the home owner's equity in the home
100%
which statement is true regarding job losses at auto dealers
14% of jobs at dealerships were lost in counties with the largest shock to net worth and only 3% of jobs at dealerships were lost in counties with the smallest shock
Which period better captures the rise of the subprime conduit mortgage market?
1995 - early 2000s
Which period better captures the collapse of the subprime conduit mortgage market?
2006 - 2015
Which period better captures a subprime mortgage market economy with only portfolio lenders?
< 1995
what is the definition of a marginal borrower?
A borrower who most likely would not have been able to get a mortgage without the dramatic expansion of credit
Other things being equal, which would have the lowest cap rate?
A building with long-term leases in a growing market.
According to Mian and Sufi's book "House of Debt", the leverage multiplier explains how
A decline in house prices leads to a larger decline in net worth for a household with leverage
Define fire sale
A fire sale is a situation in which a debtor or creditor is willing to sell an asset for a price far below its market value
The following example is from Mian and Sufi's book "House of Debt": If a homeowner buys a home worth $100,000 using an $80,000 mortgage, then the homeowner's if equity into home is $20,000. If house prices drop 20%, the homeowner loses $20,000, while the mortgage lender's makes no losses. From this example, we can infer the following:
A negative shock to the house price increases inequality because the borrower loses his full investment, whereas the lender fully owns the house.
In the absence of foresight among asset market participants, a growth in demand for real estate assets in the capital market, holding demand in the space usage market constant, will produce which of the following short-run and long-run effects?
A short-run increase in property asset prices followed by a subsequent drop
Why City Prime Office Rents would fall if the UK is not able to guarantee similar free-trade conditions than the ones currently in effect with the European Union?
Absence of free-trade agreements means more tariffs and deadweight losses, so London-based companies prefer to relocate to other European capitals and not pay these taxes
why fire sales negatively affect prices of other houses in the neighborhood
After the sale, other home owners and appraisers use the fire sale price to estimate the prices of all other homes in the area. As a result, the prices of all the homes in the area suffer. Even home owners with no debt see the value of their homes decline
which of the following paragraphs is correct
"High debt in combination with the dramatic decline in house prices increased the already large gap between the rich and poor in the United States. Yes, the poor were poor to begin with, but they lost everything because debt concentrated overall house price declines directly on their net worth."
In the question above, suppose the number of apartment units remained at 88,000 while the number of households grew from 200,000 to 220,000. To what level would real rents rise?
$475
If the cap rates prevailing in a given market are 10.5%, then how much would you expect a property to sell for in that market if its annual net income were $50,000?
$476,190.
why the answer to the previous question is important
It immediately implies that the distribution of wealth and debt matters.
How can the US pay its debt?
Taxes Printing money. Doesn't this inflate debt even more? TIPS (Treasury Inflation-Protected Securities) US nominal bonds Creating new bonds to pay down debt
The "real estate system" consists of the following three major components
The "real estate system" consists of the following three major components
define "externality of foreclosure".
The bank selling the property does not bear the negative effect of a fire sale that all the homeowners in the area do. As a result, the bank is perfectly willing to sell at a lower price, even though society as a whole would not want the bank to do so.
What does financial theory predict on an increase in bond yields for the cap rate in London:
The cap rate will increase
Long-run equilibrium in a DiPasquale-Wheaton "Four-Quadrant Model" (4QM) is found by
The rectangle with vertical sides and horizontal top & bottom whose four corners just touch the four binary relationship lines in each quadrant.
In the previous questions, what if wages and prices do not fully adjust?
There is unemployment in both DI and CI
How do Mian and Sufi convince us that economic disasters are almost always preceded by a large increase in household debt?
They take a close view to microeconomic data and find support for the "debt view" and arguments against alternative views
define mortgage underwater: Select one:
Underwater refers to the situation where the value of a house drops below the amount still owned on the mortgage.
Use the following information to answer the next 2 questions. Suppose demand for apartments in a metropolitan area is: #Apt.units=60,000 +(0.30)(# households)-(80)*($Rent/unit/mo.) If developers increase the number of apartment units from 88,000 to 100,000, over a period of several years, to what level will real rent fall in the market below the original $400/mo level if the population remains stable at 200,000 households?
(c) $250
If properties in a certain market are typically selling for prices of $100/SF and they are yielding current annual net income of $8/SF, then the typical "cap rate" prevailing in this market is:
(c) 8%.
Which statement below is true? (a) The supply side of the space market consists of investors. (b) The demand side of the space market consists of investors. (c) The supply side of the space market consists of potential tenants. (d) The demand side of the space market consists of potential tenants.
(d) The demand side of the space market consists of potential tenants
which of the following statement is true regarding tradable and non-tradable jobs
- Non-tradable jobs cater to the local economy - Tradable jobs cater to the national economy
What are the analogies between the Great Depression and the Great Recession according to Mian and Sufi's book "House of Debt"?
- Society's attitudes toward credit had changed, and purchasing on credit became more acceptable - Consumer's debt as percentage of household income sharply increase before the crisis -There was a large drop in household spending once the crises started
Adverse selection in the primary mortgage market occurs when
the borrower has more information about his characteristics (e.g., default risk, etc.) than the lender
Which are the two fundamental markets in commercial real estate?
(a) The space market and the asset market
Real estate space markets are segmented for all of the following reasons except; (a) Space users require specific locations and types of buildings. (b) Built space is fungible. (c) Buildings cannot move. (d) It is difficult and expensive to change buildings from one usage type to another (e.g., from office to apartment).
(b) Built space is fungible.대체물
segmented market
Because both supply and demand are location and type specific, real estate space markets are highly segmented. That is, space markets tend to be local rather than national, and specialized around building usage categories. This is in contrast to nationally integrated markets for homogeneous commodities
If it costs $300/SF to develop a new class A office building and the annual net rent for office space is $22.5/SF, what is the cap rate that would make additional development feasible? Also, if office buildings are currently selling at an 8% cap rate, what would be the replacement cost rent level?
Cap rate=(𝟐𝟐.𝟓)/𝟑𝟎𝟎 𝟎.𝟎𝟕𝟓≈𝟕.𝟓% R𝒆𝒑𝒍𝒂𝒄𝒆𝒎𝒆𝒏𝒕 𝒄𝒐𝒔𝒕=𝟎.𝟎𝟖∗𝟑𝟎𝟎=$𝟐𝟒/𝑺𝑭
What would be the implications of a collapse of the commercial real estate debt market in the U.K. for the office market in London?
Commercial real estate prices will go down
Which of the following is true? A. The post "Great Recession" recovery has been short and shallow, with growth rates roughly half of that normally observed in expansions. B.The post "Great Recession" recovery has been long and shallow, with growth rates roughly the double of that normally observed in expansions. C.The post "Great Recession" recovery has been long and strong, with growth rates roughly the double of that normally observed in expansions. D. The post "Great Recession" recovery has been long and shallow, with growth rates roughly half of that normally observed in expansions.
D. The post "Great Recession" recovery has been long and shallow, with growth rates roughly half of that normally observed in expansions.
household debt in the United States from 2000 to 2007
Doubled
Which period better captures the dominance of the conduit business model in the subprime mortgage market?
Early 2000s - Middle 2000s
which of the following statements best captures the "fundamentalist view":
Economic disasters are caused by some fundamentals shock to the economy such as natural disasters, a political coup, or a change in expectations of growth in the future
The EUR/USD cross-currency basis (β in terms of our notation) ) reflects the premium that owners of dollars demand for lending their dollars to international banks. When β>0, we say that the Covered Interest-rate Parity (CIP) formula does not hold. This was the case, for example, of the large deviation of the EUR/USD cross-currency basis in October 2008. As we discussed in class, this departure from the CIP was due to
European banks' difficulties to roll over their US dollar denominated loans, which grew to more than $800 billion by mid-2007
household's net worth is defined to be
Financial assets plus housing assets, minus any debt
what are the differences between the poorest and the richest households in the US in 2007
First, the richest 20 percent of home owners had a leverage ratio of only 7 percent, compared to the 80 percent leverage ratio of the poorest home owners. Second, while the poor had $4 of home equity for every $1 of other assets, the rich were exactly the opposite, with $1 of home equity for every $4 of other assets. Correct
what are implications for economic inequality of the high percentage number of mortgages underwater in Merced County, California? (Remember you can choose only one answer)
Foreclosures and lower credit scores for households with mortgages underwater, and a contagion effect of foreclosures on house prices.
Before Brexit, the Governor of Bank of England, Mark Carney, said that if the "leave" option wins, the return that investors would demand for holding longer-term U.K. government debt—or the term premium—would rise. In the same line, analysts at BlackRock said in a report on Brexit that a 'leave' vote would likely increase gilt yields. What was the economic intuition behind this forecast?
Higher yield is a consequence higher uncertainty/risk and investor's decision to reallocate their investments towards other regions outside the UK
Mian and Sufi say that it is important to differentiate between a fall in household consumption and a fall in household net worth. Give an example of two crises when the effect of a fall in household net worth has a different effect on household consumption
In the Great Recession both household consumption and household net worth fell, whereas after the dot-com bubble burst, household net worth fell but household spending grew.
why debt is the anti-insurance
Instead of helping to share the risks associated with home ownership, it concentrates the risks on those least able to beat it.
In order for the real estate system to function more efficiently and effectively, it is important for
Investors to try to forecast the economy, the space market, development activity, and the capital market.
The term "real property" refers to
Land or built space.
In a locational equilibrium
No one has an incentive to move
Is the collapse of Lehman Brothers the linchpin of the Great Recession?
No, it is not. The collapse in residential investment was in full swing in 2006, a full two years before the collapse of Lehman Brothers
Based on Figure 5.1
Non-tradable jobs declined more in small net-worth decline counties.
If the required rate of return decreases for real estate investments, do prices increase or decrease, all else being equal?
Prices increase, all else being equal; Price = NOI / Cap Rate
what argument contradicts the view that the banking sector caused the recession
Residential investment and consumption were the main drivers of the weakness for the first three quarters of the recession
In a real estate market. "constrained supply", or rising real Long-Run Marginal Cost (upward-sloping supply curve), is generally caused by
Scarcity of buildable land due to geographic or regulatory constraints.
Which of the following is an example of the private equity market?
The commercial real estate property asset market.
The "kink point" in the real estate space supply function occurs at
The current quantity of built space and the "replacement cost" rent.
did residential investment fall before or after the heart of the banking crisis?
The decline in spending was in full force before the fall of 2008. The National Bureau of Economic Research dates the beginning of the recession in the fourth quarter of 2007, three quarters before the failure of Lehman Brothers. The collapse of residential investment and durable consumption was dramatic well before the events of the fall of 2008
Mian and Sufi find that:
The higher the leverage in the home, the more aggressively the household cuts back on spending when home prices decline
In a mortgage:
The lender has the senior claim and the borrower experiences the first losses associated with any decline in house prices
the 'replacement cost' level of rent
The level of rent that is just sufficient to stimulate profitable new development in the market
The basic geographic unit in real estate space markets is typically
The metropolitan area (MSA)
The real interest rate is equal to
The nominal interest rate minus inflation
who were more exposed to a shock into housing market, the poorest or richest households
The poorest
Equilibrium between current supply and demand in the space market is reflected by
The prices (rents) and occupancy observed in the market.
Consider two islands, Debtor Island (DI) and Creditor Island (CI), and two goods in both islands, autos and haircuts. Only autos can be traded between the two islands. Also assume that people cannot move across islands. Suppose house prices collapse on DI, and levered losses lead to a sharp decline in spending on cars and haircuts. If wages and prices flexibly adjust:
Wages are lower in both DI and CI
In the fundamentals view, the interest rate channel is best described as follows:
When spending decreases, interest rates go down as demand for credit decreases with spending. And when the interest rates are low enough, consumers (and specially savers) should be induced to spend more
liquidity trap occurs
When the nominal interest rate is zero
Suppose the economy has been growing, but at some point, for some reason - overbuilding, high interest rates, aliens from outer space, whatever - housing investment tanks. Make an economic reasoning that relates this bad news to a fall in overall consumption, GDP, RRE consumption, CRE consumption, and employment.
a) Less housing investment decrease house prices. Consumers decide to consume less and save more, in part because the value of their main asset that can be put as collateral in a mortgage decreased, and in part because they have precautionary motives. Because in the U.S., private consumption is the biggest chunk of GDP, usually comprising 65-70 percent of the dollar value in a given year or quarter, less consumption means a lower GDP. Firms sell less so they decide not to hire new workers and not to sign new leases for commercial real estate. So unemployment increases and commercial real estate prices fall.
According to the 100 identical houses example in Mian and Sufi's book, "House of Debt", optimists believe the value of the houses are $125,000 and pessimists believe the houses are only worth $100,000. If there is no debt and the total wealth of all optimists combined is $2.5 million. What will the price of the houses be?
a. $100,000
which of the following statements describe their views on the Great Recession
a. Some of the decline in the economy during the heart of the financial crisis was a result of problems in the banking sector. c. Bolstering the economy by attacking the levered-losses problem directly would save the banks.
which statements regarding a bank's balance sheet are true?
a. The primary liability of most banks is deposits. c. A loan is considered an asset on the bank's balance sheet
what conclusion can be drawn from the East Asian crisis in regards to central banks?
a. To maintain independence and control over their economy, central bankers needed to prevent dollar-denominated borrowing by their local banks. c. To fight off potential runs on their currency and banking sectors in the future, central banks needed to maintain a large stockpile of dollars.
. Figure 9.1 in Mian and Sufi's book "House of Debt" shows that
b. Bank lending was highest during the height of the financial crisis
which statements on housing-supply elasticity are correct
b. Cities, like San Francisco, that are surrounded by hilly terrain or large bodies of water have inelastic housing supply. c. In an elastic housing supply environment, supply responds quickly by building more houses when house prices rise above construction costs.
what does the pessimists and optimists example show?
b. Debt facilitates an increase in the price of assets by enabling optimist to increase their influence on the market price
. According to Mian and Sufi's book "House of Debt", what does Spain's reaction to the financial crisis illustrate?
b. Even when banks are protected at all costs and mortgage relief for home owners is rejected, the banking sector can fail
what statement about government-sponsored enterprises (GSEs) is false.
b. GSEs had no requirements such as loan size or LTV ratio in order to be considered "conforming" and be purchased for securitization
which measures did the Federal Reserve take during the Great Recession?
b. Introduced a program known as "quantitative easing" c. Expanded the definition of who could borrow and what classified as acceptable collateral
which statements on mortgage-credit growth and income growth from 2002 to 2005 are true.
b. Mortgage-credit growth and income growth became negatively correlated d. Areas with lower income growth received more mortgage credit
a credit score of 620 meant a much higher probability of a mortgage being securitized. The fact that borrowers with credit scores just below 620 had much lower default rates than mortgages to borrowers with credit scores just above 620 is evidence of what?
b. Securitization directly encourages irresponsible lending
what is the "animal spirits" view on the expansion of mortgage credit?
b. The housing bubble started independently and credit merely followed.
what is one of Kindleberger's conclusion from his explorations of bubbles and financial crises?
b. The main driver of asset-price bubbles was almost always an expansion in credit supply
if optimists have $2.5 in cash and can borrow 80 percent of the value of a house, then optimists can buy houses worth up to:
c. $12.5 million
what are the results from Vernon Smith's experiment regarding bubbles
c. Stock prices fluctuated wildly, with prices deviation two to three times away from their fundamental value. d. Of the 22 experiments conducted, fourteen saw a stock market characterized by a price bubble.
. Figure 6.2 and 6.3
c. The debt centric view that the expansion in credit fueled the house-price growth.
what is the Large-Scale Asset Purchase (LSAP) program, also known as "quantitative easing
c. The program to buy long term assets that included agency debt, mortgage-backed securities, and long term treasuries from bank
the tranche process creates "safe" securities as long as what assumption holds true?
d. Default probabilities across loans are independent
One week after the vote, the yield on 10-year British government bonds, called gilts, fell to 0.87%, their lowest levels in modern history. Some analysts correctly forecast gilt yields would fall, because
domestic investors would seek a haven for cash and international investors would buy bonds in anticipation of the Bank of England cutting the interest rate. Although typically a higher yield is associated to higher uncertainty, bonds yields decreased due to such unexpected high demand for UK bonds
. In the book "House of Debt", Mian and Sufi define the "housing wealth effect" as
g. An increase in house prices represents an increase in wealth for home owners, and home owners respond to an increase in wealth by borrowing to spend more
Figure 2.2. in Mian and Sufi's book "House of Debt" implies that
he net worth of poor households collapsed from $30,000 to almost zero from 2007 to 2010
MSA
metropolitan statistical areas", encompass a central city and its surrounding suburbs. Since an MSA tends to be relatively integrated economically, culturally, and socially, it is often used as the primary geographic units of space market segmentation in real estate.
The European Union (EU) is a politico-economic union of 28 member states that are located primarily in Europe. It has an area of 4,324,782 km2 (1,669,808 sq mi), and an estimated population of over 510 million. The EU has developed an internal single market through a standardized system of laws that apply in all member states. EU policies aim to ensure
the free movement of people, goods, services, and capital within the internal market, enact legislation in justice and home affairs, and maintain common policies on trade, agriculture, fisheries, and regional development. A monetary union was established in 1999 and came into full force in 2002, and is composed of 19 EU member states which use the euro currency.
Adverse selection in the secondary mortgage market occurs when
the lender has more information about the borrower's characteristics (e.g., default risk, etc.) than the secondary market investor