Tracing the source of liquidity for distressed housing markets

Abstract

We show that profit‐seeking institutional investors provide valuable liquidity and spur the recovery of distressed housing markets. Using a quasi‐natural experiment wherein investors purchased prepackaged distressed home portfolios from government‐sponsored enterprises, we find that transaction prices of properties located within 0.25 miles of bulk‐sale properties increased by 1.4% more than homes located farther away. This positive price spillover effect helped reverse the discounts at which such properties were being sold prior to the bulk‐sale event. The price spillover effect due to the bulk‐sale event is greater for foreclosed homes (4.1%), homes similar to the bulk‐sale homes (2.5%), and homes in highly distressed neighborhoods (7.0%). Our results highlight asset disposition through pooling and institutional participation as a potential market‐driven channel for the recovery of distressed housing markets.

Real estate investors and the U.S. housing recovery

“…Our paper also pertains to the literature arguing that lax lending standards in the boom led to the emergence of individual investors in the residential market, who further fueled the housing bubble. This large literature includes Haughwout et al (2011), Chinco and Mayer (2016), Bayer et al (2021), andGao et al (2020). Contrary to the experience in the boom, we document active real estate investor activities during the recovery when overall lending conditions were stringent.…”

“…Ganduri et al. (2019) make use of a Fannie Mae REO bulk sale pilot program to quantify highly localized spillovers of large corporate investors' purchases on neighboring home values.…”

“…Researchers employ several different strategies to identify residential real estate investors in housing and mortgage data, each having advantages and limitations. A common method is to use self-reported information on occupancy status provided in mortgage data sets such as HMDA data (Gao et al 2020). Using mortgage data, however, restricts the focus only to properties purchased with mortgage financing.…”

“…Their instrument, local entrepreneurial spirit as proxied by top earner business income share in 2007, also relies on the assumptions that business owners invest locally and, furthermore, most of the business investors are nonincorporated and hence their business income appears on their personal federal tax filings. Ganduri et al (2019) make use of a Fannie Mae REO bulk sale pilot program to quantify highly localized spillovers of large corporate investors' purchases on neighboring home values.…”

“…As a result, banks contracted mortgage supply, making mortgage access difficult or costly for individual borrowers (Gete & Reher 2018). Second, a consistent rigid downward trend in 1 A growing strand of the literature including Shiller (2009), Haughwout et al (2011), Barlevy and Fisher (2010), Case et al (2012), Bayer et al (2021), Chinco and Mayer (2016), Albanesi et al (2017), DeFusco et al (2018, Nathanson and Zwick (2017), Soo (2018), andGao et al (2020) has highlighted the importance of housing speculation in driving the recent housing cycle. 2 Mian and Sufi (2014), Keys et al (2009), and Justiano et al (2017), among many others, argue that credit expansion to subprime borrowers is a key driver of the housing boom prior to the bust.…”