Real Estate: Investment and Financial Strategy (1988)

This book has evolved from an interest in formalizing theories of real es- tate financing and investment. While real estate has characteristics of illi- quidity and heterogeneity, recent developments have created markets for financial claims on property assets. These financial claims render real es- tate similar to other assets. These financial claims render real estate similar to other assets. Yet real estate markets retain degrees of ineffi- ciency, suggesting possibilities for arbitrage opportunities. Such possi- bilities are examined in the book. If sellers are prohibited by statute from transferring existing financing to buyers, they tend to hold properties longer when contract interest rates on loans exceed those prevailing in the market. Methods are required to account for and measure the quantity of mortgage equity arising from such favorable financing. Holders of mortgage backed securities face risks on both sides of interest rate movements. Should interest rates fall, debtors refinance. If interest rates rise, debtors do not refinance, and the holders of mortgage backed securities suffer capital losses. Hedging strategies are re- quired. Mortgage warrants and option pricing mechanisms are discussed, and various equity unlocking mechanisms, such as collateralized mort- gage obligations.