Borrower Risk and Housing Price Appreciation

Journal of Real Estate Finance and Economics, May 2019, Volume 58, Issue 4, pp 544–566

Posted: 27 Jun 2019

See all articles by Darren K. Hayunga

Darren K. Hayunga

University of Georgia - Department of Insurance, Legal Studies, Real Estate

R. Kelley Pace

Louisiana State University - E.J. Ourso College of Business Administration

Shuang Zhu

Kansas State University - Department of Finance

Date Written: May 26, 2019

Abstract

Maintenance and improvements affect house values and thus the observed pecuniary return. Whether due to lack of liquidity or the presence of strategic incentives, some borrowers have a higher probability of default and this could lead to lower maintenance and investment in the property. We test this hypothesis using a sample of properties on which we have repeat sales and mortgage information. We find that the predicted probability of default at the time of the original purchase significantly reduces subsequent observed pecuniary return. For instance, an increase in the probability of default from 22% to 32% leads to an 0.5% reduction in appreciation per year. Because the future house price varies with borrower risk, we examine many simulated scenarios to analyze the implications of the findings. From these scenarios, we observe that the highest risk borrowers can experience approximately 3% less appreciation per year than the lowest risk borrowers.

Keywords: House appreciation; Probability of default

Suggested Citation

Hayunga, Darren K. and Pace, R. Kelley and Zhu, Shuang, Borrower Risk and Housing Price Appreciation (May 26, 2019). Journal of Real Estate Finance and Economics, May 2019, Volume 58, Issue 4, pp 544–566, Available at SSRN: https://ssrn.com/abstract=3410519

Darren K. Hayunga (Contact Author)

University of Georgia - Department of Insurance, Legal Studies, Real Estate ( email )

Athens, GA 30602-6254
United States
706-542-1365 (Phone)

R. Kelley Pace

Louisiana State University - E.J. Ourso College of Business Administration ( email )

Department of Finance
2164 B Patrick F. Taylor Hall
Baton Rouge, LA 70803-6308
United States
(225)-578-6256 (Phone)
(225)-578-9065 (Fax)

HOME PAGE: http://www.spatial-statistics.com

Shuang Zhu

Kansas State University - Department of Finance ( email )

Manhattan, KS 66506
United States

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