Real Estate

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.

Urban success increasingly has taken two different forms in the post-war era. One involves very high house price growth with relatively little population growth. The other pairs strong population expansion with mild house price appreciation. We document the heterogeneity across MSAs in the long-run house price growth rate and show that house price growth and housing unit growth tend to be inversely related. Income growth, too, varies widely across MSAs and high house price growth markets experience both high income growth and a right-shift of their entire income distribution.

Over the last two years, the housing market has turned sharply in many parts of the country. House prices have swung from steady rates of appreciation to outright declines, while sales and construction of new homes have dropped steeply. Much of this turmoil appears related to the boom and bust in mortgage markets over the last five years. It was not supposed to work out this way.

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.

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.

Public-private partnerships (PPPs) are a favored strategy for implementing complex, large-scale projects. For more than thirty years, U.S. government officials have used PPPs to redevelop downtowns, revitalize neighborhoods, and foster economic development. Across the globe, policy makers see such arrangements as an innovative and resourceful means for dealing with the intensifying demands of urbanization. In particular, PPPs can play a central role in meeting the pressing demand for new, large-scale infrastructure investments and the equally urgent need to refurbish existing systems.

When it comes to the local economy, the local government wears more than one hat: it regulates land use and owns real property and has the authority to exercise the power of eminent domain. Each of these legal powers affects local real estate markets in ways that reach beyond local government's role as tax collector and provider of public goods and services. At different times and for different purposes, planners attempt to harness or to stimulate the forces of supply and demand in real estate markets.