The Consequences of the Housing Boom on Municipal Debt (Job Market Paper)
State and local governments' debt increased by over 130% from 2000 to 2006. While the credit expansion of households at the same time period received much attention, the credit expansion of state and local governments has been overlooked. To provide some explanation for the credit expansion, I assemble a novel dataset on local government debt in California from Bloomberg and house prices from Zillow.com. With this data I estimate the elasticity between local government debt and house prices using cross-sectional variation in the share of developable land from Saiz (2010). My estimates suggest that a percentage point rise in house prices in a given county beyond the long-term trend is associated with a 0.44 percentage point rise in debt of local governments within the county, controlling for supply and demand forces for credit. These results are consistent with a stylized model that relates changes in properties' value with local government debt and expenditure.
Leaving Big Money on the Table: Arbitrage Opportunities in Delaying Social Security [video] (with Jason Scott, John B. Shoven and Sita N. Slavov)
Recent research has documented that delaying the commencement of Social Security benefits increases the expected present value of retirement income for most people. Despite this research, the vast majority of individuals claim Social Security at or before normal retirement age. Claiming Social Security early is not necessarily a mistake, as delaying Social Security commencement requires forgoing current income in exchange for future income. The decision to claim early could therefore rationally be driven by liquidity constraints, mortality concerns, bequest motives, a high time discount rate, or a variety of other preference related factors. However, for some individuals, delaying Social Security offers a significant arbitrage opportunity because they can defer Social Security and have higher income in all future years. Arbitrage exists for most primary earners who either purchase a retail-priced annuity or opt for a defined benefit annuity when a lump sum payout is offered, while forgoing the opportunity to defer Social Security. These individuals are essentially buying an expensive annuity when a cheaper one is available, and their decision to claim Social Security early is almost certainly a mistake. The magnitude of the mistake can reach up to approximately $250,000.
The Declining Insurance Benefit in the Municipal Bond Market (with Christos A. Makridis)
Using data on municipal bonds issued in California and New York between 1996 and 2014, this paper documents a decline in the benefit of municipal bond insurance, explores its underlying determinants, and quantifies its aggregate effect. First, we find that the insurance benefit declined remarkably from approximately 5.1% of the overall deal value between 1996 and 2001 to 0.5% by 2011-2014. Second, we examine five plausible explanations: changes in bond maturities, issuance size value, issuers' credit risk, insurers' credit risk and interest rate environment. Our results indicate that the main reason is a decline in the insurer's credit strength, specifically the market's perception, for two reasons: (a) higher yields due to lower insurer credit ratings, and (b) an appearance of a market premium for insurance. Third, through a back-of-the-envelope calculation, the decline in the insurance benefit explains 34% of the decline in the aggregate insurance market.