Recent turbulences in the financial sector and a looming recession in the U.S. have put a spotlight on real estate markets. The fall in house prices and the resulting severe losses from mortgage foreclosures serve as a reminder that real estate investments are risky. This is particularly true for residential real estate investments. It has been argued that the risks associated with these investments are among the largest economic risks faced by individuals. Focusing on the investments of private households into single-family homes, we will be pursuing two related aims:
(1) measuring and characterizing the (price) risk of residential real estate
(2) studying the extent to which these risks affect real estate investment decisions, such as buying a single-family home or developing vacant land.
Both aims share a common methodological challenge, arising from the pecularities of real estate: because houses are very heterogenous and because residential real estate investment decisions are complex, we need to consider a multitude of factors to explain price variation or the decision whether or not to buy a home; because buying residential real estate is costly and complex, houses are rarely traded and our data is (relatively) sparse. The heterogeneity and sparsity of the data precludes a completetly non-parametric approach to both aims (1) and (2). Parametric (linear) models, on the other hand, may not be sufficiently flexible to fit this complex data, particularly the dependency of prices on the location of a property. We will therefore turn to the adaptive semiparametric models developed in projects B5 and B1.
This project is divided into three work packages (WPs).
WP1 is the cornerstone of our project and is devoted to aim (1). In WP1 we take advantage of the transactions database provided to us by Berlin's surveyor commission (GAA), containing rich information on all single-family home sales in Berlin. Using the unique GAA home sales database, we search for optimal parametric and semiparametric hedonic regression models to explain and predict property prices, given their characteristics. A particular focus is on the role of location for explaining price differences and whether newly available GEO-codes and adaptive smoothing methods can be used to identify local submarkets.
WP2 is devoted to both aims (1) and (2). It extends our research from WP1 to the valuation and price risk of undeveloped land. We employ the recently acquired GAA land sales database, containing information on all transactions of undeveloped land in Berlin. From a theoretical point of view, land purchases give owners the perpetual option to develop the land at an optimal time and size in the future, giving rise to an option premium to today's value of land. We will empirically test the real-option approach to land valuation. Since the underlying asset of the land development option is the (future) built property, the results from WP1 on locally adaptive house price valuation will serve as a necessary input. Moreover, entries from the GAA land sales database that are eventually developed and sold can be found in the GAA home sales database. That is, we can observe at least for most of the vacant lots when and how (type and size of building) they were developed. Hence, we can study the observed decisions which lots to develop and when and how to develop them (and the role of risk therein). This is the part of WP2 devoted to aim (2).
In WP3 we use household data from the German Socio Economic Panel Study (GSOEP) to study if the observed decisions of households whether and when to buy a home are influenced by risk concerns. WP3 is thus devoted to aim (2). Key explanatory variables are measures of local real estate risk and expected duration in the dwelling, but -given that career concerns and life-cycle considerations are likely to influence the ownership decision- measures of labor income risks are also incorporated. We will therefore cooperate with the labor economics group of the CRC (A9, C7 and C13) in this WP, in particular when we reverse the viewpoint by studying if home-ownerships has lock-in effects that harm mobility and opportunities in the labor market.
Schulz, R., Wersing, M. and Werwatz, A. (2008), Renting vs. owning and the role of income risk: The case of Germany, SFB 649 Discussion paper (forthcoming).
Schulz, R., Staiber, M., Wersing, M. and Werwatz, A. (2008), The Accuracy of Long-term Real Estate Valuations, in: Applied Quantitative Finance, 2nd Version, edited by: Wolfgang K. Härdle, Nikolaus Hautsch, Ludger Overbeck.
Schulz, R., and Werwatz, A. (2008), House Prices and Replacement Cost: A Micro-Level Analysis, SFB 649 Discussion paper 2008-013, Revise and Resubmit, Journal of Urban Economics.
Görzig, B., Gornig, M. and Werwatz, A. (2008), Firm-Wage Differentiation in East Germany - Non-Parametric Analysis of the Wage Spread, The Economics of Transition, 16 (2) , 273-292.
Geppert, K., Gornig, M., and Werwatz, A. (2008), Economic Growth of Agglomerations and Geographic Concentration of Industries - Evidence for West Germany, Regional Studies, 42 (3), 413- 421.
Görzig, B., Gornig, M. and Werwatz, A. (2007), Produktvielfalt und Produktivität der IKT-Produzenten: Eine Analyse unter Nutzung verbundener amtlicher Unternehmensdaten (Product Variety and Productivity of ICT-Producers), Wirtschafts- und Sozialstatistisches Archiv, 1 (2), 145-161.
Görzig, B., Gornig, M. and Werwatz, A. (2007), Produktdiversifizierung: Konvergenz zwischen ost- und westdeutschen Unternehmen - Eine Dekomposition mit Mikrodaten der amtlichen Statistik (Product Diversification: Have East-German Enterprises Caught-Up with the West?), Jahrbücher für Nationalökonomie und Statistik (Journal of Economics and Statistics), 227 (2), 168-186.
Slama, R., and Werwatz, A. (2005), Controlling for continuous confounding factors: non- and semi-parametric approaches, Revue d'Epidémiologie et de Santé Publique, 53, 2S65-2S80.
Görzig, B., Gornig, M. and Werwatz, A. (2005), Nichtparametrische Dekomposition der Lohndifferenzen zwischen ost- und westdeutschen Betrieben, Allgemeines Statistisches Archiv, 89 (4), 365-381.
Slama, R., Bouyer, J., Windham, G., Fenster, L., Werwatz, A. and Swan, S.H. (2005), Influence of Paternal Age on the Risk of Spontaneous Abortion, American Journal of Epidemiology, 161 (9), 816-823.
Kirman, A., Schulz, R., Härdle, W. and Werwatz, A. (2005), Transactions that did not happen and their influence on prices, Journal of Economic Behavior and Organization, 56 (4), 567-591.
Christensen, B. J., Lentz, R., Mortensen, D. T., Neumann, G.R. and Werwatz, A. (2005), On-the-Job Search and the Wage Distribution, Journal of Labor Economics, 23 (1), 31-58.
"Location, Location, Location: Extracting Location Values from House Prices", Verein für Socialpolitik, Annual Meeting 2013.
"The Accuracy of Long-term Real Estate Valuations", Verein für Socialpolitik, Annual Meeting 2008 (accepted).
"Renting versus Owning and the Role of Income Risk: The Case of Germany", European Real Estate Socitey, Annual Conference 2008.
"Is East Germany's Firm-Wage Spread converging to the West? - A Non-Parametric Analysis", Verein für Socialpolitik, Annual Meeting 2007.
"Renting versus Owning and the Role of Income Risk: The Case of Germany", IREBS 2007 Regensburg Conference on Real Estate Economics and Finance.
"Firm specific wage spread in Germany - decomposition of regional differences in inter firm wage dispersion", Econometric Society European Meeting 2006.
"Real Estate Valuation and Tobin's Q: An Empirical Analysis", Verein für Socialpolitik, Annual Meeting 2005.
Activities within the CRC 649