Tsur Somerville

This thesis contains three essays on real estate finance and economics. Both chapter 2 and chapter 3 study a real estate developer's timing strategies under uncertainty and chapter 4 studies the ratio of housing price-to-income.Chapter 2 analyzes the effects of leverage on the timing of developments because most real estate developers depend heavily on leverage. In particular, it investigates the leverage effects on real estate developments that involve conversion of land from agricultural to urban use. Leverage matters for a developer who wants to optimize the timing of developments.Chapter 3 studies the effects of heterogeneity of real assets on the timing of developments because each property is unique and its value is likely to move together with values of neighboring properties. Heterogeneity matters for a developer who builds multiple properties in a project.Chapter 4 analyzes the price-to-income ratio which has been used widely as a measure for housing bubble. A cross-city comparison of price-to-income ratios can overestimate bubble in cities of high amenities.

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In this dissertation, I examine two research questions. In chapters 2 and 3, based on idea of reference value that was first proposed by Kahneman and Tversky, I look at a potential house seller’s pricing strategy when the reference value plays a role.In chapter 2, I focus on the reference-dependence and its implications on loss aversion behavior, and I compare model predictions with documented empirical findings in the literature. In particular, I show that the stylized empirical evidence in the literature has relatively limited power on testing loss aversion, and I provide new specifications that aim to correctly test the loss aversion effect. In chapter 3, I examine a reference-dependent seller’s pricing strategy in a less heterogeneous housing market such as the multi-unit residential market. Acknowledging the fact that units in the same building serve as close substitutes for each other, I show that the recent transaction price on a unit in the same building may generate two signaling effects. First, the average willingness to pay among buyers is positively correlated with the observed price, which generates a spatio-temporal autocorrelation effect; second, after observing the prior price, the heterogeneity of the potential buyer’s willingness to pay decreases, inducing house sellers to mark down their asking prices. In chapter 4, I examine the power of monitoring and forcing contract on improving the managerial efficiency of REITs. I put particular emphasis on its implications regarding the choice of advisor type in REITs. I show that, for both internal and external advisors, increasing levels of monitoring power will increase their equilibrium effort under a stochastic forcing contract. Furthermore, I show that a crucial driving force regarding advisor choice is the heterogeneity of monitoring power between internal and external advisors and across REIT firms. Provided that the gap of monitoring power is large enough between internal and external advisors, shareholders could make use of the heterogeneity, and induce higher effort from external advisors. Hence, I am able to provide a theoretical justification regarding the potential appeal of an external managerial structure, which is usually regarded as being inferior to an internal managerial structure.

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