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Paul E. Carrillo, George Washington University; William M. Doerner, FHFA; William D. Larson, FHFA;
The transaction price of identical housing units can vary widely due to heterogeneity in buyer and seller preferences, matching, and search costs, generating what we term "markups" above or below the average market price. We measure markups for 3.4 million purchase-money mortgages and show they can predict mortgage defaults and credit losses conditional on default even after accounting for collateral coverage (loan-to-value ratio) and a comprehensive set of other covariates. The findings suggest standard collateral coverage estimation may be inaccurate, with implications for both individual and portfolio-level credit risk assessment.
This research was selected as the best paper in 2018 in real estate valuation by the American Real Estate Society. A revised version of this paper has undergone external peer-review and has been accepted for publication in an academic journal with open (free) access. Citation: Paul E. Carrillo, William M. Doerner, William D. Larson. 2023. "House Price Markups and Mortgage Defaults."
Journal of Money, Credit and Banking, 55(4), 747-782. https://onlinelibrary.wiley.com/doi/10.1111/jmcb.12940
The transaction price of identical housing units can vary widely due to heterogeneity in buyer and seller preferences, appraisers, and search costs, generating "markups" above or below the average market price. These markups are mean reverting upon subsequent transactions, suggesting transitory factors play a role in same-unit dynamics. We show markups are an important driver of mortgage delinquencies, defaults, prepayments, and credit losses conditional on default. In general, our findings highlight several important aspects of mortgage risk management, including underwriting, insurance, and unit-level house value dynamics.
This research was selected as the best paper in 2018 in real estate valuation by the American Real Estate Society.
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