The Role of Interest Rates in Influencing Long-Run Homeownership Rates

As a stated policy objective, the U.S. Department of Housing and Urban Development (HUD) seeks to boost the national homeownership rate to 70 percent by 2006. To accomplish this goal, they estimate that 3.8 million additional families be added to the ranks of U.S. homeowners. Furthermore, HUD estimates that the homeownership gap between minority and nonminority families must be reduced by a full 15 percent. Many policy instruments—both targeted and otherwise—have been suggested to increase homeownership. These range from low downpayment loans, greater access to credit in underserved areas, and interest rates subsidies. However, little is know about the efficacy of these measures to raise long-term homeownership rates. In this analysis, we focus on the role of interest rates on homeownership rates and the housing stock. In particular, we provide a critical review of the literature on the relationship between housing and interest rates in contrast to other determinants of homeownership and changes in housing supply. We then present our own estimates of the influence of interest rates on homeownership and housing starts. We find that interest rates play little direct role in changing homeownership rates. While changes in interest rates may affect the timing of changes in tenure status from renter to owner, the long-run ownership rate appears independent of interest rates. We find housing starts are, however, sensitive to changes in the interest rate. This implies that housing supply, or at least the timing of changes in housing supply, is sensitive to interest rates. It is though this mechanism that the stock of owner-occupied housing expands, though household formation and immigration may leave the ownership rate unchanged. We conclude by discussing whether other instruments, such as low down payment loans and improved technology for assessment of credit risk, may potentially be better suited to increasing long-term homeownership rates.     

Pathways to Homeownership: An Analysis of the Residential Location and Homeownership Choices of Black Households in Los Angeles

Recent studies have documented substantially depressed levels of homeownership among African-American households. While prior analyses have focused largely on racial disparities in household financial characteristics, few studies have assessed the potential role of location choice and locational attributes in the homeownership choice decision. This research applies individual-level Census data from the Los Angeles area to explicitly model the residential location and tenure choice decisions of African-American households. Research findings indicate that there is substantial variation across African-American and white households in the determinants of locational choice among South Central LA, other parts of Los Angeles, and Inland Empire (San Bernardino County) areas. In addition, African-American and white households are found to differ in how location characteristics impact in their tenure choices. Overall, after accounting for location, the empirical analysis served to explain three-fourths of the 23 percentage point gap in homeownership rates between Los Angeles white and black households, whereas models that lack controls for location accounted only for about one-half of the observed gap.     

Spreading the fear: The central role of CBOE VIX in global stock market uncertainty

Construction of efficient portfolios is reliant on understanding the correlation between assets. If correlations change markedly during times of economic turmoil then investors are exposed to greater risk at the most inopportune time. We examine the linkages between global stock markets using measures of market uncertainty (implied volatility). Using a sample of daily changes in G7 and BRIC implied volatility measures, over a 20-year sample period, we demonstrate that uncertainty in U.S. markets plays a pivotal role in global stock market uncertainty. “Fear is spread” across markets, as heightened uncertainty in U.S. markets is transmitted across global markets. Conversely, changes in global market uncertainty do not explain changes in U.S. market uncertainty. While there is a clear increase in connectedness during crisis periods, we observe a disparity in the way that inter-dependencies change during the two major economic crises in our sample period; the GFC (2007–2009) and COVID-pandemic (2020). The additional importance of US news largely drives our results during the GFC, while the effect is spread among several countries (particularly within European markets) during COVID.     

Politico-economic consequences of rising wage inequality

This paper uses a dynamic political economy model to evaluate whether the observed rise in wage inequality and decrease in median to mean wages can explain some portion of the relative increase in transfers to low earnings quintiles and relative increase in effective tax rates for high earnings quintiles in the U.S. over the past several decades. Specifically, we assume that households have uninsurable idiosyncratic labor efficiency shocks and consider policy choices by a median voter which are required to be consistent with a sequential equilibrium. We choose the transition matrix to match observed mobility in wages between 1978 and 1979 in the panel study of income dynamics (PSID) data set and then evaluate the response of social insurance policies to a new transition matrix that matches the observed mobility in wages between 1995 and 1996 and is consistent with the rise in wage inequality and the decrease in median to mean wages between 1979 and 1996. We deal with the problem that policy outcomes affect the evolution of the wealth distribution (and hence prices) by approximating the distribution by a small set of moments. We contrast these numbers with those from a sequential utilitarian mechanism, as well as mechanisms with commitment.     

Homeownership,informality and the transmission of monetary policy

Cross-country aggregate data exhibits a strong (positive) relationship between the size of the informal employment and aggregate homeownership rates. We investigate this empirical observation using a cash-in-advance model with housing markets and argue that the rate of inflation is important in explaining the nexus between informality and homeownership rates. Specifically, we uncover a novel monetary transmission mechanism and show that households with informal employment desire to economize on their short-term cash usage and avoid periodic rental payments when (i) informality is associated with constrained business investment finance, and (ii) inflation expectations are high. Our empirical and theoretical findings highlight an important interaction between the conduct of monetary policy and the performance of housing markets.     

Removing Homeownership Bias in Taxation: The Distributional Effects of Including Net Imputed Rent in Taxable Income

The income tax systems of most countries entail a favourable treatment of homeownership, compared to rental‐occupied housing. Such ‘homeownership bias’ and its consequences for a wide range of economic outcomes have long been recognised in the economic literature. Although a removal of the homeownership bias is generally advocated on efficiency grounds, its distributional implications are often neglected, especially in a cross‐country perspective. In this paper, we aim to fill this gap by investigating the first‐order effects, in terms of distribution of income and work incentives, of removing the income tax provisions favouring homeownership. We consider six European countries – Belgium, Germany, Greece, Italy, the Netherlands and the UK – that exhibit important variation in terms of income tax treatment of homeowners. Using the multi‐country tax benefit model EUROMOD, we analyse the distributional consequences of including net imputed rent in the taxable income definition that applies in each country, together with the removal of existing special tax treatments of incomes or expenses related to the main residence; thus, we provide a measure of the homeownership bias. We implement three tax policy scenarios. In the first, imputed rent is included in the taxable income of homeowners, while at the same time existing mortgage interest tax relief schemes and taxation of cadastral incomes are abolished. In the two further revenue‐neutral scenarios, the additional tax revenue raised through the taxation of imputed rent is redistributed to taxpayers, through either a tax rate reduction or a tax exemption increase. The results show how including net imputed rent in the tax base might affect inequality in each of the countries considered. Housing taxation appears to be a promising avenue for raising additional revenues, or lightening taxation of labour, with no inequality‐increasing side effects.     

The equilibrium effect of fundamentals on house prices and rents

Using a dynamic equilibrium model of housing tenure choice with fully specified markets for homeownership and rental properties, and endogenous house prices and rents, this paper studies the effect of fundamentals on equilibrium house prices and rents. Lower interest rates, relaxed lending standards, and higher incomes are shown to account for approximately one-half of the increase in the U.S. house price–rent ratio between 1995 and 2006, and to generate the pattern of rapidly growing house prices, sluggish rents, increasing homeownership, and rising household indebtedness observed in the data.     

Have Anti-Discrimination Housing Laws Worked? Evidence from Trends in Black Homeownership

This paper explores the hypothesis that anti-discrimination legislation has been an important factor in shaping the evolution of minority homeownership spatial trends. It does so by studying homeownership patterns of black and non-black households during the 1970s, 1980s, and 1990s using Census data and data that proxies for the level of enforcement of the Fair Housing Act over time. The results provide unambiguous support for the view that enforcement has been a key factor for black homeownership since the 1970s, as we find a consistent positive relationship between fair housing policy enforcement and black homeownership growth. In addition, we find clear evidence that black homeowners gained access to more diverse and higher-income neighborhoods over time, with the shift occurring beginning in the 1980s and continuing in the 1990s. Importantly, both of these results are race-specific results, as there are no such patterns among non-black homeowners. Taken together, the results are consistent with the view that the housing-related civil rights legislation passed during the 1960s and 1970s helped alter, and reduce, the role that race played in housing markets.     

Homeownership as a Constraint on Asset Allocation

Personal preferences and financial incentives make homeownership desirable for most families. Once a family purchases a home they find it impractical (costly) to frequently change their ownership of residential real estate. Thus, by deciding how much home to buy, a family constrains their ability to adjust their asset allocation between residential real estate and other assets. To analyze the impact of this constraint on consumption, welfare, and post-retirement wealth, we first investigate an individual’s optimal asset allocation decisions when they are subject to a “homeownership constraint.” Next, we perform a “thought experiment” where we assume the existence of a market where a homeowner can sell, without cost, a fractional interest in their home. Now the housing choice decision does not constrain the individual’s asset allocations. By comparing these two cases, we estimate the differences in post-retirement wealth and the welfare gains potentially realizable if asset allocations were not subject to a homeownership constraint. For realistic parameter values, we find that the homeowner would require a substantial increase in total net worth to achieve the same level of utility as would be achievable if the choice of a home could be separated from the asset allocation decision. The robustness of the analysis is evaluated with respect to the model’s parameters and initial state variables. We find that changes in the values of the constraint (i.e., the value of the home) and the expected real rate of home value appreciation are the only state variables or parameter that is associated with a large change in asset allocation and/or the burden imposed by the housing constraint. This finding suggests the importance of a detailed examination of the impact of inter-regional differences in home prices and expected rates of appreciation on asset allocation and post-retirement wealth.     

Housing policy and the progressivity of income taxation

Most countries have tax provisions and subsidies to promote homeownership. These provisions generate an asymmetry in the tax treatment of owner- and rental-occupied housing, which affects the incentives to supply tenant-occupied housing. This paper analyzes the quantitative importance of the interaction of these provisions with the progressivity of income taxation in the context of an overlapping generations model with housing and rental markets. The model replicates the key facts observed in the economy, as well as distributional patterns of ownership, house size, and landlord behavior. The model suggests that the progressivity of income taxation can amplify or mitigate the effects of the asymmetries with important implications for housing tenure, housing consumption, portfolio reallocations, and welfare that differ from those reported in the literature.