Real Estate

In this chapter, I describe the coordinates of the global application of public-private partnerships (PPP) and identify central commonalities of sector collaboration for both infrastructure development and urban redevelopment/regeneration projects. The comparison across these two types of "hard" asset-based initiatives will, I hope, highlight the central issues of implementation and underscore the need for policymakers to address the nature of risk sharing, which I believe is central to the PPP strategy at the project level.

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.

As the subprime mortgage market flourished in the 1990s, innovative lenders turned to a new type of loan: the 2/28 mortgage, designed to allow borrowers with less-than-ideal credit to buy a home and to repair their credit histories. This mortgage offered a fixed two-year "teaser" rate, followed by 28 years of payments that would adjust according to market rates such as LIBOR. As an example shows, the teaser rate was relatively affordable, but when the adjustable rate kicked in, borrowers might see their monthly payments eventually increase by as much as 50 percent.

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.

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.

ZigZag Zippers planned a $90 million renovation of their 100-year-old factory site. What was the least expensive option for funding this long-term project?

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.