Abstract: We show that a shift from bank to nonbank issuers of mortgage-backed securities (MBS) led to easier credit standards and higher interest rates for Federal Housing Administration (FHA) mortgages and increased lending to riskier borrowers. We estimate these causal, equilibrium effects using a difference-in-differences design that exploits plausibly exogenous geographic variation in the exit of JPMorgan Chase from FHA lending. Our findings highlight that MBS issuers and the industrial organization of securitization markets are crucial for credit supply, and are among the first direct pieces of causal evidence on how bank-nonbank shifts affect equilibrium credit supply in consumer credit markets.
Abstract: This paper introduces “spatial extrapolation,” a concept that refers to how economic expectations for one region are formed by extrapolating from the economic outcomes of another geographic area. We demonstrate this unique form of extrapolation by analyzing the purchasing behavior of out-of-town (OOT) homebuyers. Using data from approximately 3 million OOT housing transactions in the U.S. between 2002 and 2017, we find that a 50% increase in five-year hometown house prices leads OOT buyers to pay 2% more for OOT properties. The higher the hometown house price growth, the lower the realized returns and purchase discounts obtained by OOT buyers. To rule out the wealth effect, the paper designs two strategies. First, we classify renters, migrants, and second-home (SH) buyers to control the wealth increase from hometown properties. Second, we estimate geographic heterogeneity in extrapolative beliefs. We find that OOT buyers from higher extrapolation hometowns increase their purchase prices more after the hometown house price growth. Overall, our research highlights the potential spillover effects of extrapolation into other asset markets and provides evidence that extrapolative expectations have broader effects than previously recognized.
Abstract: Property tax revenues – the largest discretionary source of revenue for local governments - adjust at a pace that is inconsistent with the growth and decline of property values in the US. We show that this form of revenue smoothing may be rooted in the political economy of municipalities, cities, and school districts. In particular, we show an asymmetry of property tax re-assessments: they spike during positive markets (increasing tax revenue), but do not show the same sensitivity to negative markets (which would decrease tax revenue collected). Measures of local budget constraints are positively related to the mark-up of a property’s total dollar assessment values relative to its eventual transaction price. Additionally, the individuals that staff local property assessment offices appear to hold sway in the property assessment process. We find that local tax assessors: 1.) have tax assessments on their own properties that are significantly lower than neighboring properties; and 2.) these tax assessments also grow significantly more slowly than neighbors. We further find a link between this assessment gap of tax assessors own properties and the tax-maximizing municipality behaviors we document.
Discussant: Dayin Zhang, University of Wisconsin-Madison
