UC Berkeley

This dissertation consists of three chapters on the effects that housing markets have on the real economy. In the United States, personal real estate had an aggregate market value of $30 trillion in 2019 (Source: Federal Reserve Flow of Funds). Additionally, data on real estate transactions and the underlying loans and properties are extremely high quality, thereby making real estate an ideal empirical laboratory.

The first chapter shows that mortgage credit access is vital for small business financing and alleviating credit constraints. To do this, I rely on micro-data from a merge of the personal home equity extraction activity of business owners to the confidential IRS tax records of their businesses. With direct measurement, I find that one out of four small businesses created during the mid-2000s were funded by personal home equity, double the rate previously thought based on evidence from survey data. Entrepreneurs use their personal home equity to alleviate credit constraints, which this chapter finds has a long-run effect on both the survival and employment levels of small businesses. Not only are new businesses credit constrained, but existing small businesses also face credit constraints that have a persistent effect. Following the Great Recession, restrictions to mortgage credit access have caused one-third of the decline in firm entry rates in the post-crisis period.

In the second chapter, I show how variations in personal housing wealth feeds into professional behavior through studying mutual fund managers. The literature on overconfidence in financial markets has primarily focused on retail investors. Using novel data that identifies the personal real estate holdings of fund managers, this chapter studies the degree to which overconfidence affects the returns and investment behavior of institutional investors. Positive shocks to the personal real estate of mutual fund managers should not affect their professional behavior. However, this chapter finds that a one standard deviation positive home price shock leads to a decline in 4-factor alpha of 37bps per year. This is due to fund managers becoming overconfident in their underperforming trading positions, making worse selling choices, and trading more frequently. Fund managers who are more likely to be affected by overconfidence, such as less educated and less experienced fund managers, show a much stronger response. This chapter provides evidence that overconfidence is time varying and shows how institutional investors respond to behavioral shocks that should be orthogonal to their professional duties.

In the third chapter, I, along with my co-authors, Aya Bellicha, Richard Stanton, and Nancy Wallace, study how the vast outstanding stock of mortgage debt affects U.S. Treasury bond yields. We propose an empirical duration measure for the stock of U.S. Agency MBS that appears to be less prone to model risk than measures such as the Barclays Effective Duration measure. We find that this measure does not appear to have a strong effect on the 12-month excess returns of ten-year Treasuries as would be expected if shocks to MBS duration lead to commensurate shocks to the quantity of interest rate risk borne by professional bond investors (Hanson, 2014; Malkhozov, Mueller, Vedolin, and Venter, 2016). Given this negative reduced form result, we then explore the mortgage and treasury hedging activities of the primary MBS investors such as commercial banks, insurance companies, the agencies, the Federal Reserve Bank, mutual funds, and foreign investors. We find that the only investors that may follow the models Hanson (2014) and Malkhozov et al. (2016) are life insurance firms. We also find a relation with banks however we cannot rule out that this is merely correlation. Life insurance firm market share has declined over the period, dropping below 10% since 1996 and reaching 4% in 2016. Of the investors we are not able to study, hedge funds and pensions/retirement funds are the two investor groups that may trade along the Hanson (2014) and Malkhozov et al. (2016) models. However, although these two investor groups held almost 25% of the Agency MBS market (including households and non profit organizations) in the late 1990s, post crisis their share has fallen below 10%.