The Journal of Real Estate Finance and Economics

Using home purchase loan application data, we study buyer responses to the uncommon occurrence of the appraised value coming in below the contract price (i.e. a low appraisal), which sharply raises the probability of downward price renegotiation. We propose that two mechanisms drive the higher renegotiation rates. First, a liquidity channel, visible for financially constrained borrowers for whom a low appraisal impacts financing costs. Second, for financially unconstrained borrowers, we identify a news channel whereby the information content of the low appraisal alone induces borrower renegotiation. Importantly, we show that low appraisals result in lower renegotiated prices through these channels without a substantially lower likelihood of a loan application leading to loan origination or notably longer times from contract signing to sale.

This paper studies the effects that benefits of control and moral hazard have on the evolution of large stakes in REITs. A large risk-averse shareholder trades off the net benefits of REIT business monitoring and control with the cost of bearing risk beyond the level compensated by the REIT return premium. In equilibrium, the large shareholder gradually adjusts his ownership shares level (as long as his marginal benefits from holding shares increase in his REIT stake) towards the long-run competitive equilibrium in which his marginal share valuation coincides with that of the market. Because of the moral hazard, such level of ownership (and monitoring) is, in general, inefficient. The speed of adjustment is positively correlated with the agent’s risk aversion and company volatility, and negatively correlated with his marginal benefits of control and beneficial monitoring effects.

In standard principal-agent problems, the issue at hand is how to align the interests of the agent with those of her principal. A commonly used contract involves the principal paying the agent a percentage of the sale price as commission. With respect to real estate brokerage contracts, it has been argued that percentage commission contracts fail to provide sufficient incentives to the agent. This paper re-evaluates the standard solution to a one seller, one agent agency problem by introducing more than one agent. It is shown that percentage commission contracts can induce first-best effort levels from agents. The result is due to the negative externalities created by the winner-takes-all race among agents. The optimal commission rates in this model are inconsistent, however, with the observed uniformity in commission rates across markets in the USA.

In this article the price-setting behavior of the district Federal Home Loan Banks (FHLBs) is investigated. Previous studies have viewed the FHLB system as a policy authority that sets the interest rate on FHLB advances in an attempt to stabilize mortgage and housing markets. In this study a profit-maximizing model of FHLB behavior is developed and empirically tested, and the results compared to a model of the FHLB system as a policy authority. The empirical results offer support for the hypothesis of profit-maximizing behavior and indicate that, in addition to the FHLB's cost of funds, factors that influence thrift demand for FHLB advances, deposits, and capital stock are important in explaining FHLB choice variables.

Using a variation of the Nelson-Siegel term structure model we examine the sensitivity of real estate securities in six key global markets to unexpected changes in the level, slope and curvature of the yield curve. Our results confirm the time-sensitive nature of the exposure and sensitivity to interest rates and highlight the importance of considering the entire term structure of interest rates. One issue that is of particular of interest is that despite the 2007–09 financial crisis the importance of unanticipated interest rate risk weakens post 2003. Although we examine a range of markets the empirical analysis is unable to provide definitive evidence as to whether REIT and property-company markets display heightened or reduced exposure.

This article reports on the determinants of the ARM choice for commercial real estate projects. The theoretical literature suggests that commercial real estate projects are more likely to be financed with an adjustable-rate mortgage (ARM) if the project's income stream or value is expected to rise with inflation over time. The empirical model estimated is a structural probit probability model of the ARM choice. Our results demonstrate that commercial borrowers typically place great emphasis on relative interest-rate differentials when deciding which mortgage is best. We also find that commercial mortgage borrowers will ordinarily be reluctant to issue an ARM when the fixed interest rate is low.