August 21, 2012

Preventing Future Housing Bubbles

Ask TCU Department of Finance Chair Mauricio “Mo” Rodriguez how millions of American homeowners became victims of the recent housing bubble, and the veteran Neeley School of Business professor won’t mince words with his reply.

“Some of the main reasons for the bubble were low interest rates, loose underwriting standards, some ethical lapses and high price estimates for homes all across the country,” said this nationally recognized expert on finance and real estate. “These high valuations were supported by the demand from over-extended borrowers as the bubble formed and grew larger. When that unsustainable support vanished, the table was set for the housing price-crash that followed.”

Rodriguez has spent more than a decade devising new analytical models that can help prevent dangerous, erroneous valuations from wreaking havoc in the housing market.

A frequent contributor to both real estate and finance journals, Rodriguez has published numerous studies that explore methods for ensuring that housing-price estimates are reasonably on target. An innovative series of Rodriquez-authored research studies show how appraisers can use Geographical Information Systems (GIS) technology to accurately measure the price estimate of a housing unit as a function of the physical proximity of other nearby homes and their valuations. Another study relied on GIS technology combined with an innovative mathematical model — devised by him and his colleagues — that can accurately measure the impact of “driving distance from a housing unit to downtown” on the selling price of that unit.

Describing the problems that helped create the destructive bubble and the widespread foreclosures that followed it, Rodriguez suggested that “if we’d had a more solid understanding of the actual dynamics of real estate market valuations, perhaps the mortgage mess could have been avoided.”

One of Rodriguez’s research studies provides an interesting example of how using tools of measurement in determining housing values can help appraisers zero in closely on accurate price estimates. Published in the January 2000 The Appraisal Journal as “The Market Value of Mature Trees in Single-Family Housing Markets,” the research study used an innovative analytical model for accurately measuring the effect of mature on-site trees on the price of single-family dwellings.

The Appraisal Journal study, which examined 269 homes for sale around Baton Rouge, Louisiana at an average price of about $93,000 each, employed multiple regression analysis in comparing dwellings with mature trees to those without. Thanks to their savvy model, the researchers were able to derive a remarkably precise estimate of the impact on price of the mature trees.

As the published journal article neatly pointed out, “The market-derived estimate shows that mature trees contributed about 2 percent of home values [or about $2,000 of the asking-price for a $100,000 home] in the examined market.”

For Rodriguez, accurate price estimates “help shield the market from the problems that can arise from erroneous valuations.”

According to the longtime TCU business professor, conducting effective research on housing prices dovetails nicely with “the overall teaching mission of the Neeley Business School, and with TCU’s mission as a whole.”

“One of our major goals at Neeley is to help educate business leaders who will be ethical leaders,” Rodriguez said. “By now, it’s apparent that there were ethical lapses in the mortgage mess that helped push this economy into recession, with some very painful consequences for millions of American homeowners. Hopefully, doing research on housing that helps derive accurate price estimates, while also teaching students about the importance of ethics in business, allows us to make a positive contribution to the economy as a whole.”

While contributing dozens of scholarly research articles to professional journals on real estate and corporate finance in recent years, Rodriguez also found time to serve as a consultant to the U.S. Department of Justice, where he has helped the U.S. government better understand valuations. Those same valuations, if not accurately understood, would have cost taxpayers millions of dollars.

Rodriguez is convinced that the best way to maintain a healthy bottom line (while also avoiding expensive lawsuits and potential prosecutions) is to “act ethically in every business decision you make.”   

“I don’t try and make huge claims for my research,” Rodriguez said. “This is the kind of research where you don’t usually experience some huge ‘eureka!’ moment that changes the world. But what you can accomplish, if you’re fortunate, is a continuing series of small steps that, over time, have a good chance of producing more accurate valuations and provide better insights regarding how markets work. Hopefully, we can also help in the educational development of ethical future business leaders who will surely improve the world of business as a whole.

“As a researcher and teacher at Neeley, that’s the kind of potential contribution that makes you happy to come to work each day.”


Elaine Cole
Public Relations Manager
Neeley School of Business at TCU