Columbia Business School Research

Professional house price forecast data are consistent with a rational model where agents must learn about the parameters of the house price growth process and the underlying state of the housing market. Slow learning about the long-run mean generates overreaction to forecast revisions and a modest response of forecasts to lagged realizations. Heterogeneity in signals and priors about the long-run mean helps the model account for cross-sectional dispersion in forecasts. Introducing behavioral biases helps improve the model's predictions for short-horizon overreaction and dispersion.

Non-informational cues, such as facial expressions, can significantly influence judgments and interpersonal impressions. While past research has explored how smiling affects business outcomes in offline or in-store contexts, relatively less is known about how smiling influences consumer choice in e-commerce settings even when there is no face-to-face interaction.

ASC 842, which requires balance sheet recognition of right-of-use (ROU) lease assets, resulted in a large increase in reported assets since 2019, thus impairing the time-series consistency of metrics that use assets (e.g., asset turnover). This paper shows that ROU assets can be estimated quite precisely using lease disclosure. Adding the estimated ROU asset for pre-ASC 842 observations substantially improves the ability of operating assets to explain sales. It also increases the ability of growth in operating assets to predict sales growth and explain analysts’ revenue growth forecasts.

Working from home resulted in a sharp contraction in office demand. We built a valuation model to find that the office stock lost about 45% in value. More for low-quality buildings and in cities with a larger IT sector and less for trophy buildings. We discuss the implications for mortgage lenders and the vitality of cities.

This article analyzes the hedging potential of real estate and especially looks at the impact of lease contracts in various countries around the world on the inflation hedge capability for both expected and unexpected inflation. The dataset consists of direct real estate rent and capital value data for 59 cities/MSAs in 25 countries between 1991 and 2020 to make international comparison over a long time period possible. The results indicate that real estate is a good hedge against inflation, and especially against unexpected inflation.

Housing affordability has become the main policy challenge for most large cities in the world. Zoning, rent control, housing vouchers, and tax credits are the main levers employed by policy makers. We build a new dynamic stochastic spatial equilibrium model to evaluate the effect of these policies on house prices, rents, residential construction, labor supply, output, income and wealth inequality, as well as the location decision of households within the city. The analysis incorporates risk, wealth effects, and resident landlords.

We analyze the impact of the Second Avenue Subway (Q-train) construction on local real estate prices, which capitalize the benefits of transit spillovers. We find evidence of higher real estate prices in the vicinity of areas served by the new Q-train, relative to other areas in Manhattan's Upper East Side. Only 30% of the private value created by the subway leads is captured through property taxes, and is insufficient to cover the cost of the subway. Value capture through targeted property tax increases can help close the funding gap.

The covid-19 crisis has led to a sharp deterioration in firm and bank balance sheets. The government has responded with a massive intervention in corporate credit markets. We study equilibrium dynamics of macroeconomic quantities and prices, and how they are affected by government intervention in the corporate debt markets. We find that the interventions should be highly effective at preventing a much deeper crisis by reducing corporate bankruptcies by about half, and short-circuiting the doom loop between corporate and financial sector fragility.

This article empirically examines the magnitude of risk premiums for direct real estate investments on a global basis. As this article analyzes ex-ante risk premiums over more than 25 years consistently across the world, it enhances current knowledge about the regional differences between risk premiums and helps long-term investors with their global portfolio allocation over time. On a global level, the authors find a risk premium of 4.1% for Gordon’s growth and 3.7% for two-stage growth model. The periodic growth model shows a slightly lower risk premium of 3.1%.

We follow a representative panel of millions of consumers in the U.S. from 2007 to 2017 and document several facts on the long-term effects of the Great Recession. There were about six million foreclosures in the ten-year period after Lehman's collapse. Owners of multiple homes accounted for 25% of these foreclosures, while comprising only 13% of the market. Foreclosures displaced homeowners, with most of them moving at least once. Only a quarter of foreclosed households regained homeownership, taking an average four years to do so.

We propose a new valuation method for private equity investments. First, we construct a cash-flow replicating portfolio for the private investment, using cash-flows on various listed equity and fixed income instruments. The second step values the replicating portfolio using a flexible asset pricing model that accurately prices the systematic risk in listed equity and fixed income instruments of different horizons.

The major cities of the world have attracted a flurry of out-of-town (OOT) home buyers. Such capital inflows affect housing affordability, the spatial distribution of residents, construction, labor income, wealth, and ultimately welfare. We develop a spatial equilibrium model of a city with substantial heterogeneity among residents. We calibrate the model to the New York and Vancouver metro areas. The observed increase in OOT purchases is associated with 1.1% (5.0%) higher house prices and a 0.1% (0.34%) welfare loss in New York (Vancouver).

Shadow bank market share in residential mortgage origination nearly doubled from 2007 to 2015, with particularly dramatic growth among online "fintech" lenders. We study how two forces, regulatory differences and technological advantages, contributed to this growth.

The rigidity of mortgage contracts and a variety of frictions in the design of the market and the intermediation sector hindered efforts to restructure or refinance household debt in the aftermath of the financial crisis. In this paper, we focus on understanding the design and implementation challenges of ex ante and ex post debt relief solutions that are aimed at a more efficient sharing of aggregate risk between borrowers and lenders.

Exploiting variation in the timing of resets of adjustable rate mortgages (ARMs), we find that a sizable decline in mortgage payments (up to 50%) induces a significant increase in car purchases (up to 35%). This effect is attenuated by voluntary deleveraging. Borrowers with lower incomes and housing wealth have significantly higher marginal propensity to consume. Areas with a larger share of ARMs were more responsive to lower interest rates and saw a relative decline in defaults and an increase in house prices, car purchases, and employment.

We evaluate the effects of the 2009 Home Affordable Modification Program (HAMP) that provided intermediaries with sizeable financial incentives to renegotiate mortgages. HAMP increased intensity of renegotiations and prevented substantial number of foreclosures but reached just one-third of its targeted indebted households. This shortfall was in large part due to low renegotiation intensity of a few large intermediaries and was driven by intermediary-specific factors.

This paper studies a quantitative general equilibrium model of housing. The model has two key elements not previously considered in existing quantitative macro studies of housing finance: aggregate business cycle risk, and a realistic wealth distribution driven in the model by bequest heterogeneity in preferences. These features of the model play a crucial role in the following results. First, a relaxation of financing constraints leads to a large boom in house prices. Second, the boom in house prices is entirely the result of a decline in the housing risk premium.

We introduce a tractable dynamic monitoring technology into a continuous-time moral hazard problem and study the optimal long-term contract between principal and agent. Monitoring adds value by allowing the principal to reduce the intensity of performance-based incentives, reducing the likelihood of costly termination. We present a novel characterization of optimal dynamic incentive provision when performance-based incentives may decline continuously to zero. Termination happens in equilibrium only if its costs are relatively low.

Buildings have a major impact on the environment through excessive use of resources, such as energy and water, and large carbon dioxide emissions. In this paper we revisit the study of Eichholtz et al. (2010) about the economics of environmentally sustainable buildings and estimate the effect of green building practices on market rents. For this, we use new matching methods that take advantage of the clustered structure of the buildings data.

This paper examines the contribution of out-of-town second-house buyers to mispricing in the housing market. We show that demand from out-of-town second-house buyers during the mid 2000s predicted not only house-price appreciation rates but also implied-to-actual-rent-ratio appreciation rates, a proxy for mispricing. We then apply a novel identification strategy to address the issue of reverse causality.

People choose where to live and how much to invest in housing. Traditionally, the first decision has been the domain of spatial economics, while the second has been analyzed in finance. Spatial asset pricing is an attempt to combine equilibrium concepts from both disciplines. In the finance context, we show how spatial decisions can be framed as an expanded portfolio problem. Within spatial economics, we identify the consequences of hedging motives for location decisions.

We document that contractual disclosures by intermediaries during the sale of mortgages contained false information about the borrower's housing equity in 7–14% of loans. The rate of misrepresented loan default was 70% higher than for similar loans. These misrepresentations likely occurred late in the intermediation and exist among securities sold by all reputable intermediaries. Investors — including large institutions — holding securities with misrepresented collateral suffered severe losses due to loan defaults, price declines, and ratings downgrades.

We investigate whether homeowners respond strategically to news of mortgage modification programs by defaulting on their mortgages. We exploit plausibly exogenous variation in modification policy induced by U.S. state government lawsuits against Countrywide Financial Corporation, which agreed to offer modifications to seriously delinquent borrowers with subprime mortgages throughout the country. Using a difference-in-difference framework, we find that Countrywide's relative delinquency rate increased more than ten percent per month immediately after the program's announcement.

We study the equilibrium properties of an overlapping-generation economy where agents choose where to locate and how much housing to own, and city residents vote on the number of new building permits every period. Undersupply of housing persists in equilibrium under conditions we characterize. City residents invest in housing because they expect their investment to be protected by a majority opposed to urban growth. They vote against growth because they have invested in local housing.

This paper provides a theoretical analysis of the efficiency of prepayment penalties in a dynamic competitive lending model with risky borrowers and costly default. When considering improvements in the borrower's creditworthiness as one of the reasons for refinancing mortgages, we show that refinancing penalties can be welfare improving, and that they can be particularly beneficial to riskier borrowers in the form of lower mortgage rates, reduced defaults, and increased availability of credit.

Large long-run differences in average house price appreciation across metropolitan areas over the past 50 years have led to wide spatial dispersion in house prices. We show this can be explained in large part by inelastic supply of land in some attractive locations combined with an increasing number of high-income households nationally. The resulting high house prices crowd out lower-income households from living in high price growth superstar housing markets, inducing a right-shift in the local area income distribution.

We consider the optimal design of mortgage-backed securities (MBS) in a dynamic setting in which a mortgage underwriter with limited liability can engage in costly hidden effort to screen borrowers and can sell loans to investors. We show that (i) the timing of payments to the underwriter is the key incentive mechanism, (ii) the maturity of the optimal contract can be short, and that (iii) bundling mortgages is efficient as it allows investors to learn about underwriter effort more quickly, an information enhancement effect.

We characterize the optimal mortgage contract in a continuous time setting with stochastic growth in house price and income, costly foreclosure, and a risky borrower who requires incentives to repay his debt. We show that many features of subprime loans can be consistent with properties of the optimal contract and that, when house prices decline, mortgage modification can create value for borrowers and lenders.

The past 25 years have represented two periods of extreme movements in U.S. and global house prices that appear to be much larger than can be easily explained by changes in fundamentals. These episodes spurred research on housing bubbles that focused attention on the role of outsized expectations in excessive house price appreciation. By contrast, some economists pointed to alternative explanations for excess volatility, including liquidity constraints, lending cycles, search externalities, and zoning delays.

Many economic decisions can be described as an option exercise or optimal stopping problem under uncertainty. Motivated by experimental evidence such as the Ellsberg Paradox, we follow Knight (1921) and distinguish risk from uncertainty. To afford this distinction, we adopt the multiple-priors utility model. We show that the impact of ambiguity on the option exercise decision depends on the relative degrees of ambiguity about continuation payoffs and termination payoffs. Consequently, ambiguity may accelerate or delay option exercise.

Blight findings have functioned as a cornerstone for condemnation since the great urban decline of the mid-twentieth century prompted governments at all levels throughout the country to intervene in the real estate market. Elements of blight, and then the term itself, became a basis for this intervention. But the use of blight as a basis for takings has become increasingly controversial as its application has migrated from slum clearance to urban renewal, then to economic development projects, and on to revenue-enhancing projects.

We examine whether securitization impacts renegotiation decisions of loan servicers, focusing on their decision to foreclose a delinquent loan. Conditional on a loan becoming seriously delinquent, we find a significantly lower foreclosure rate associated with bank-held loans when compared to similar securitized loans: across various specifications and origination vintages, the foreclosure rate of delinquent bankheld loans is 3% to 7% lower in absolute terms (13% to 32% in relative terms).

This article studies optimal mortgage design in a continuous-time setting with volatile and privately observable income, costly foreclosure, and a stochastic market interest rate. We show that the features of the optimal mortgage are consistent with an option adjustable-rate mortgage (option ARM). Under the optimal contract, the borrower is given discretion of how much to repay until his balance reaches a certain limit. The default rates and interest rate payment on the mortgage correlate positively with the market interest rate.

We study the structure of optimal wedges and capital taxes in a dynamic Mirrlees economy with endogenous distribution of skills. Human capital is a private, stochastic state variable that drives the skill process of each individual. Building on the findings of the labor literature, we construct a tractable life-cycle model of human capital evolution with risky investment and stochastic depreciation.

I examine the impact of a property tax relief program in New York State that lowered the marginal cost of school expenditure to homeowners. I find that a typical school district, which received 20% of its revenue through the program in the school year 2001–2002, raised expenditure by 4.1% and local property taxes by 6.8% in response to the program. I then examine how the preferences of various groups of local taxpayers affect educational spending by identifying systematic variation across districts in the response to fiscal incentives.

The global economic crisis in September 2008 was preceded by the crises of 2007: the subprime mortgage crisis, the corporate credit crunch, and the "quant liquidity crunch." The evolution of these crises appears to have resulted from a set of "deleveraging" that started in the subprime mortgage market but then spilled over into a number of other asset markets and resulted in large premiums in multiple markets. To respond to these events, new proprietary factors have been deployed that are not vulnerable to the actions of others.

We propose a new three-pronged plan to address the recent harmful flood of foreclosures. Our plan would address the major barriers that inhibit the ability of third-party servicers to modify mortgages the way portfolio lenders are now doing with greater success. The plan provides greater compensation for servicers to perform their duties, removes legal constraints that inhibit modification, and addresses critical second liens that often get in the way of effective mortgage modifications.

We find that fixed effects related to the location of firm's headquarters explain variation in broad based option grants after controlling for industry effects and firm characteristics traditionally known to affect option granting. Location matters because of local labor market conditions and social interaction with neighboring firms.

This paper argues that the U.S. mortgage debacle must be analyzed in the broader setting of global real estate markets. Recent U.S. home price growth closely tracked increases in other developed economies. The analysis distinguishes among market regions in terms of supply elasticity and localized transactions-costs. A series of user-cost models are presented which imply that interest rate fluctuations must figure prominently in any explanation of movements in price/rent ratios. National factors such as the expansion of subprime credit must also be accounted for.

The first hints of trouble in the mortgage market surfaced in mid-2005, and conditions subsequently began to deteriorate rapidly. Mortgage defaults and delinquencies are particularly concentrated among borrowers whose mortgages are classified as "subprime" or "near-prime." The main factors underlying the rise in mortgage defaults appear to be declines in house prices and deteriorated underwriting standards, in particular an increase in loan-to-value ratios and in the share of mortgages with little or no documentation of income.

The separation of ownership and control allows controlling shareholders to pursue private benefits. We develop an analytically tractable dynamic stochastic general equilibrium model to study asset pricing and welfare implications of imperfect investor protection. Consistent with empirical evidence, the model predicts that countries with weaker investor protection have more incentives to overinvest, lower Tobin's q, higher return volatility, larger risk premia, and higher interest rate.

We combine data from the housing market with data from the North Carolina Sex Offender Registry to estimate how individuals value living in close proximity to a convicted criminal. We use the exact location of sex offenders to exploit variation in the threat of crime within small homogeneous groupings of homes, and we use the timing of sex offenders' arrivals to control for baseline property values in the area. We find statistically and economically significant negative effects of sex offenders' locations that are extremely localized.

Public/private partnerships have become a favored strategy for implementing complex urban developments in the United States and Western Europe, but the large volume of literature on the topic falls short of providing city planners, development experts, and policy analysts the knowledge needed for either teaching or practice. In the late 1970s, the blurring of lines between public and private action spurred significant intellectual debate in the U.S.

While standard real options models assume that agents possess a constant rate of time preference, there is substantial evidence that agents are impatient about choices in the short term but are patient when choosing between long-term alternatives. We extend the real options framework to model the investment-timing decisions of entrepreneurs with time-inconsistent preferences.

Entrepreneurs often face undiversifiable idiosyncratic risks from their business investments. We extend the standard real options approach to an incomplete markets environment and analyze the joint decisions of business investments, consumption/savings, and portfolio selection. For a lumpsum investment payoff and an agent with a sufficiently strong precautionary savings motive, an increase in volatility can accelerate investment, contrary to the standard real options analysis.

Friedman's contribution to the consumption literature goes well beyond the seminal permanent-income hypothesis. He conjectured that the marginal propensity to consume out of financial wealth shall be larger than out of "human wealth," the present discounted value of future labor income. I present an explicitly solved model to deliver this widely-noted consumption property by specifying that the conditional variance of changes in income increases with its level.

How does one tell when rapid growth in house prices is caused by fundamental factors of supply and demand and when it is an unsustainable bubble? In this paper, we explain how to assess the state of house prices - both whether there is a bubble and what underlying factors support housing demand - in a way that is grounded in economic theory. In doing so, we correct four common fallacies about the costliness of the housing market.

This paper provides a model of investment timing by managers in a decentralized firm in the presence of agency conflicts and information asymmetries. When investment decisions are delegated to managers, contracts must be designed to provide incentives for managers to both extend effort and truthfully reveal private information. Using a real options approach, we show that an underlying option to invest can be decomposed into two components: a manager's option and an owner's option. The implied investment behavior differs significantly from that of the first-best no-agency solution.

I propose an intertemporal precautionary saving model in which the agent's labor income is subject to (possibly correlated) shocks with different degrees of persistence and volatility. However, he only observes his total income, not individual components. I show that partial observability of individual components of income gives rise to additional precautionary saving due to estimation risk, the error associated with estimating individual components of income. This additional precautionary saving is higher, when estimation risk is greater.