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Borrower Risk and Housing Price Appreciation

  • Darren K. Hayunga
  • R. Kelley Pace
  • Shuang Zhu
Article
  • 62 Downloads

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 

Notes

Acknowledgments

We thank the editors and referee for helpful comments. Hayunga gratefully acknowledges financial support from the Terry-Sanford Research Award.

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Department of Insurance, Legal Studies and Real EstateUniversity of GeorgiaAthensUSA
  2. 2.LREC Endowed Chair of Real Estate, Department of FinanceLouisiana State UniversityBaton RougeUSA
  3. 3.Department of FinanceKansas State UniversityManhattanUSA

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