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Working Paper 18-02: House Price Markups and Mortgage Defaults

Published: 3/28/2018
Author:

Paul E. Carrillo, George Washington University; William M. Doerner, FHFA;​​​​ William D. Larson, FHFA;

*Revised September 2018

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​​Abstract:

The transaction price of identical housing units can vary widely due to heterogeneity in buyer and seller preferences, matching, and search costs, generating "markups" above or below the average market price.  These markups are mean reverting upon subsequent transactions, suggesting dynamics that are unrelated to market fundamentals. We show markups are an important driver of mortgage delinquencies, defaults, prepayments, and credit losses conditional on default even after accounting for collateral coverage (loan-to-value ratio) and a comprehensive set of other covariates. Our findings suggest standard collateral coverage estimation may be inaccurate, with implications for credit portfolio risk assessment.

This research was selected as the best paper in 2018 in real estate valuation by the American Real Estate Society.​

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​Abstract:

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 2017 in real estate valuation by the American Real Estate Society.

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