A theory of predictable excess returns in real estate

✍ Scribed by Matthew Spiegel; William Strange

• Publisher: Springer US
• Year: 1992
• Tongue: English
• Weight: 951 KB
• Volume: 5
• Category: Article
• ISSN: 0895-5638
• DOI: 10.1007/bf00174806

✦ Synopsis

A principal-agent model is employed to characterize the equilibrium mortgage contract. The value of a house depends on the actions of its owner but affects the wealth of both the owner and the lender who writes the mortgage contract with which the house is purchased. Because of this, the buyer is exposed to moral hazard. In some situations, this can lead to inefficient maintenance and predictable excess returns to home ownership. Even though there are potential buyers willing to pay back more money, the bank will not write loans for these consumers because of the adverse incentive effects of such an action.