Over the past twenty years, the real estate markets of the United States have been swept by enormous change. A sector of the economy that had long been resistant to change, real estate has been and is continuing to be transformed by the process of securitization on both the debt and equity side. Just twenty years ago, the vast majority of single family residential mortgage loans were provided by local banks or savings and loan associations that held the debt in their portfolios until maturity or prepayment. Today, most single family mortgage debt is sold into the secondary mortgage market and converted into securities. Ten years ago, mortgage loans for commercial properties were largely originated and held by commercial banks, pension funds or insurance companies. In recent years, with the exception of the meltdown of the commercial mortgage-backed securities market in the summer of 1998, the proportion of commercial loans that were securitized rapidly grew. Just six or seven years ago, real estate investment trusts (REITs) were commonly thought of as the investment entity that crashed and burned in the 1970s. In the last two or three years, however, REITs have increasingly come to be seen as a dominant, if not preeminent ownership vehicle in many real estate markets throughout the nation.
Landlord abandonment of rental housing has affected many American cities since the 1960’s. Because of data limitations, there have been few empirical analyses of the determinants of housing abandonment. In this paper, we use a rich database that contains information on individual residential properties in New York City to estimate a reduced form model of owner abandonment. We model an owner’s decision to abandon his or her property as being similar to an investor’s decision to exercise a put option on a financial instrument. When required to pay delinquent taxes, a wealth-maximizing landlord has an incentive to cede ownership of his or her residential property when the value of all outstanding liens exceeds the property’s market value. Estimates from the model are used to examine whether empirical evidence supports this option model of abandonment.