Research | Research Briefs | Recent PublicationsRecent Publications by Ziman Center Affiliated Faculty
The Ziman Center was formed with a mandate to foster cutting edge real estate related research that is published in high quality journals. The following are three recent publications by Ziman Center Affiliated Faculty that illustrate the important intellectual contribution of our faculty.
“Homeownership as a Constraint on Asset Allocation” by Stephen Cauley, Andrey Pavlov and Eduardo Schwartz published in The Journal of Real Estate Finance and Economics, Volume 34, 2007.
Synopsis:
The starting point for this paper is the observation that buying a home is a lumpy investment that places a constraint on the owner’s asset allocation decisions. By deciding how much home to buy, a family limits their ability to adjust their asset allocation between residential real estate and other assets. As long as the home is owned, the value of the family’s investment in residential real estate is determined by market conditions. The authors refer to this phenomenon as a “homeownership constraint.”
This paper analyzes the impact of this constraint on life time consumption, welfare, and post retirement wealth. The analysis proceeds by investigating an individual’s optimal asset allocations with and without a “homeownership constraint.” By comparing these two cases, the authors estimate life cycle differences in consumption, asset allocations, post-retirement wealth and the welfare gains realizable if asset allocations were not subject to a homeownership constraint. For realistic examples, the authors find that a homeownership constraint can have a relatively large effect on a mid-career individual’s asset allocation and post-retirement wealth. When housing is “affordable” (e.g., the mid-west), the loss in utility resulting from the housing constraint is quite small, but when “affordability” is a major problem (e.g., Los Angeles or New York City), the loss in utility is likely to be large. For example, for areas where homes are just affordable, the burden of the constraint can be equivalent to up to 25 percent of initial wealth. The results of this paper suggest that homeownership may not be the best way to accumulate wealth for many families, i.e., from the prospective of wealth accumulation they invest too much in residential real estate.
Kahn, “Gentrification Trends in New Transit Oriented Communities: Evidence from 14 Cities That Expanded and Built Rail Transit Systems.” published in Real Estate Economics, Vol 36, 2007.
Synopsis:
The starting point for this paper is the observations that over 25 billion dollars were spent between 1970 and 2000 in major US cities on the construction of new rail transit lines. While the supply of rail transit has increased, the fraction of metropolitan-area workers commuting using public transit has declined. Proponents of rail transit investment argue that it promotes environmental sustainability and helps to strengthen center city economic viability. This paper examines the consequences of transit expansions in 14 of the 16 major cities that expanded and built rail transit systems between 1970 and 2000. The analysis is by matched census tracts, one receiving and the other not receiving rail transit, in a city.
The author begins by examining the attributes that predict a community being a recipient of increased access to rail transit. Key community characteristic in census tracts that received increased access to rail transit were compared with similar census tracts in the same metropolitan area that did not experience increased proximity to rail transit. The author found that communities that obtain a new “Walk and Ride” station were more likely to gentrify than communities that obtain a new “Park and Ride” station. Across the 14-city sample, two cities that stand out in terms of overall gentrification effects are Boston and Washington, D.C. In other cities, such as Los Angeles and Portland, the author finds no evidence of gentrification based on home price dynamics and shares of the community that are college graduates. The analysis suggests that public transit expansions may not gentrify every community they reach. Public transit stations often act as a poverty magnet. The urban poor are less likely to own cars and thus place a greater value on rail access. In some metropolitan areas such as Atlanta and Los Angeles, for example, the share of college graduates living in communities near new “Park and Ride” stations declines relative to trends in comparable census tracts. Unlike “Walk and Ride” stations, communities close to new “Park and Ride” stations often experience increases in poverty. This could partially explain why so many rich suburban communities (such as Georgetown in Washington, D.C.) fear the extension of public transit into their community.
“Commercial Office Space: Testing the Implication of Real Options Models with Competitive Interaction” by Eduardo Schwartz and Walter Torous, published in Real Estate Economics, Vol. 35, 2007.Synopsis:
History suggests that as long as there has been real estate development, there have been real estate development booms and busts. Until recently explanations for these cycles have been ad hoc at best. This paper develops and tests a model of competitive real estate development that can help in understanding development booms. The starting point for the model is the observation that the decision to undertake a real estate development project is equivalent to the decision to exercise a “real” option, where a real option can be thought of as the right, but not the obligation, to undertake a business decision (e.g., start a development project). The real options approach to valuation is designed to captures the value of the flexibility to respond to future market conditions. The authors’ model takes into account the fact that the exercise of the option to build by one developer may affect the price received by other developers, and so influence their optimal exercise strategy. For example, if a developer delays the start of a project, it may come-on-line at the same time as many other projects.
The authors use CoStar Office Report data to investigate the implications of their real option model. They focus on a developer’s option to develop additional office space and investigate the effects of explanatory variables implied by the real option model, including the degree of competition within a market (as measured by a Herfindahl concentration ratio), on the trigger point at which development occurs. Movements in the trigger point are proxied by the number of building starts, with a greater number of starts corresponding to a lower trigger point. The authors’ empirical analysis uses CoStar data on the number of office building starts across 28 U.S. metropolitan areas over the 1998 to 2002. Their results are consistent with the real options theory. For example, an increase in the volatility of lease rates, all else being equal, results in a decrease in the number of building starts. The number of building starts is also influenced by the competitive nature of the local commercial real estate market. All else being equal, more competition amongst local developers, results in a greater number of building starts or, equivalently, a lower trigger point at which the option to develop is exercised. Furthermore, they find evidence that the effect of volatility on a developer’s option to delay is attenuated by greater competition in a particular market. The authors conclude that incorporating game theoretic concepts into real options models clearly improves our understanding of commercial real estate investment decisions.
