Another Look at Tenure Choice, Inflation, and Taxes

The purpose of this paper is to explore the impact of inflation on the demand for housing. The first part of the paper presents a theoretical model that identifies the effects of inflation on the after-tax cost of housing and the choice between rental and owner-occupied housing. The second part discusses the results of a simulation model that measures the effect of inflation on the aggregate demand for housing, the aggregate homeownership rate, and the price of housing. The paper concludes that while inflation can be expected to increase the aggregate demand for housing and the price of housing relative to the general price level, inflation should ultimately lead to lower rates of homeownership. A corollary that is probably more relevant today is that lower inflation rates should reduce the real value of the housing stock and increase the homeownership rate. The paper also contains forecasts of the impact of the Tax Reform Act (TRA) of 1986 upon housing demand and the probability of homeownership for a variety of households.     

Market Conditions and Housing Choices: A Comparison of Homeownership Across Three Decades

This article uses information on out‐of‐pocket housing cost and house price appreciation along with the geo‐coded version of the Panel Study of Income Dynamics to consider the differences in the impact of these and other variables on the tenure choices of sample households across three time periods, the 1970s, the 1980s and the 1990s. Specifically, an extended continuous time probability model is used to examine households' transitions from renting to owning and subsequent possible transitions either back to rental tenure or to another owned home during our three observation periods. Coefficient estimates show that financial variables such as house price appreciation and out‐of‐pocket housing cost play an important role in determining all the transitions. In addition, the analysis demonstrates the interesting result that the cumulative likelihoods of homeownership derived from the model are consistently lower than the probabilities of an initial transition to homeownership from rental tenure during the observation period. Finally, the magnitude and timing of the impact on homeownership of a policy experiment that eliminates the mortgage interest deduction are shown to differ substantially across the three decades.     

Rates of Return on Housing of Low-and Moderate-Income Owners

While long-term returns to capital invested in owner-occupied housing have been competitive with other investment alternatives, no evidence exists on the market performance of the owner-occupied housing in which low- and moderate-income households would be most likely to invest. This article thus attempts to answer the question of whether the "affordable housing units" that are relevant to policy discussions concerning low- and moderate-income homeownership have experienced different rates of price appreciation than have higher valued dwellings. The national file of the American Housing Survey is used to estimate appreciation rates by value class in representative U.S. housing markets. We find that for the period 1974 through 1983 appreciation rates for lower valued housing were generally about equal to those for higher valued housing.     

Investor Confidence as a Determinant of China's Urban Housing Market Dynamics

China's urban housing market dynamics suggest that evolving investor confidence may be a relevant demand shifter. Such investors are continually updating their beliefs about the state of the macroeconomy and the policy uncertainty related to national and local housing policies. We build a 35 Chinese city real estate confidence index that varies over time and across cities. This index predicts subsequent house price appreciation and new housing sales. We document evidence of heterogeneous effects of investor confidence depending on a city's demographics and the city's elasticity of housing supply. Our results based on a new household‐level expectations survey bolster the case that investor expectations are an important determinant of real estate price dynamics.     

Taxes,Inflation, Speculation and the Cost of Homeownership*

This article formulates a measure of the cost of homeownership which accounts for (1) the tax subsidy to homeowning, (2) the element of expected inflation in mortgage interest rates and (3) speculation about appreciation in real house prices. Each component of the total cost of homeowning is estimated annually across the decade of the 1970s. Total real costs are found to have trended down during the period, primarily because of a decline in the real interest rate and increases both in the real tax subsidy and in expectations of real appreciation.     

An Intertemporal Empirical Analysis of the Renter's Decision to Purchase a Home

In recent years a controversy has developed regarding the responses of different types of families to increases in the relative cost of homeownership. In order to provide evidence on this question, this study employs samples of renters from the Panel Study of Income Dynamics to estimate the marginal probability of home purchase and the conditional expectation of the house value to income ratio. These cross-section estimations are performed for two separate time periods: 1968–70 and 1974–76. Among the conclusions reached (by analyzing intertemporal changes in predicted purchase probabilities and value to income ratios) are (1) that first-time homebuyers have not stretched their housing budgets in response to inflationary expectations, and (2) that the probability of purchase by many of these families has declined over time, especially at low income levels.     

The Impacts of Borrowing Constraints on Homeownership

This paper utilizes microdata to directly quantify the impact of mortgage underwriting criteria on individual homeownership propensities. To determine whether a family is constrained by these criteria, the optimal home purchase price is estimated. The results indicate that wealth and income constraints both reduce homeownership propensities, with a stronger impact for wealth constraints. Mortgage market innovations of the early 1980s seem to have reduced these effects. The research indicates, however, that even in well-developed capital markets, the presence of borrowing constraints adversely affects homeownership propensities.     

The Investment in Housing As a Forward Market Transaction: Implications for Tenure Choice and Portfolio Selection

A model of tenure choice is presented which treats the benefits and costs of homeownership from a theory of finance perspective. The incremental benefits from homeownership over renting housing services are from two sources: protection against rental price risk (a forward transaction in the housing market) and from a possible capital gain from the eventual sale of a house (substitutes for portfolio investment). The cost of these benefits is higher initial outlay on housing, which reduces the funds available for portfolio investments. The comparative statics of this model is presented. It is shown that rental risk and portfolio risk add to the value of homeownership. Since homeownership is a partial substitute for portfolio investment, it is shown that the lower the covariance between portfolio returns and future home prices the more valuable is homeownership. In the presence of differential borrowing opportunities it is shown that the leverage available to housing significantly increases the value of homeownership.     

Risk and the User Cost of Housing Services

This paper derives a risk-adjusted user cost for housing services, capable of application in price indexes, demand, and the measurement of income and returns to homeownership. The risk-adjusted user cost is the after-tax sum of an interest rate and a risk premium, less expected capital gains. Expected capital gains are based on a factor pricing specification. It is shown that both national and local factors affect capital gains on housing.     

Distributional Consequences of Alternative Mortgage Instruments

One of the major factors hindering the introduction of alternative mortgage instruments is the possibility of adverse consequences to certain groups of households seeking to obtain credit for homeownership. This study examines this issue through an analysis of cross-sectional household data obtained from the 1970 Survey of Consumer Finances. Using multiple regression analysis, a series of structural demand models are derived and estimated. These models relate the probability of homeownership, levels of housing consumption, mortgage credit usage, and downpayment to income, assets, and other socioeconomic variables, to variables representing the relative price of housing and homeownership, and to certain variables representing the present value and cash flow costs of mortgage credit. Several mortgage-related variables are found to be influential in housing demand decisions. These models are then used to simulate alternative instrument introduction. The graduated-payment and price-level adjusted mortgages are predicted to be superior to the current instrument of mortgage finance in encouraging homeownership, housing consumption, and the use of mortgage credit among all household classes. The standard variable-rate mortgage, especially one tied to a short-term interest rate, is predicted to be inferior to the standard instrument, with the most adverse impacts upon lower-income, young, elderly, and black households.     

Housing Price Dynamics,Mortgage Credit and Reverse Mortgage Demand: Theory and Empirical Evidence

This article presents some theoretical and empirical approaches for identifying interactions among fundamental economic variables that determine housing prices. Using home equity conversion mortgage (HECM) loan‐level data, this study quantifies the major risks of reverse mortgages and shows that higher housing prices induce higher demand for reverse mortgages among elderly homeowners. Senior citizens rationally hold pessimistic expectations about future housing price appreciation and lock in their home‐equity gains by obtaining reverse mortgages, which in turn led to the substantial HECM growth prior to the financial crisis of 2008. A novel simulation also forecasts HECM loans under various economic scenarios. From a mortgage credit perspective, these findings generate several policy implications for the implementation of “HECM 3.0.”     

Who benefits the most? Risk pooling in mortgage loan insurance: Evidence from the Canadian mortgage market

This article evaluates the effect of mortgage loan insurance (MLI), an essential macroprudential tool available to policy makers, on housing affordability, household leverage, and the overall welfare of the economy. A dynamic model of the housing market with heterogeneous households and competitive housing and mortgage markets is constructed and is calibrated to Canadian data. We find that relaxing the mandatory nature of MLI required for mortgages with a loan-to-value ratio of 80% or more, in favor of a counterfactual system where MLI reflects credit risks, dampens demand for housing to purchase and puts downward pressure on house prices. Some of the households with low income and low asset holdings can no longer afford a house; therefore, the aggregate homeownership rate drops. In contrast, demand for rental units increases and rents go up.     

Homeownership Returns, Tenure Choice and Inflation

This paper empirically investigates the impact of inflation on homeownership returns and tenure choice when the assumptions underlying the user cost of housing are modified to reflect separately the effects of unanticipated and anticipated inflation. The analysis demonstrates that when the user cost model is specified to reflect the impact of anticipated inflation on house prices, the mortgage interest rate and the capitalization rate, the returns to homeownership are lower than determined by previous user cost studies and are consistent with a reasonably efficient market.     

Price Expectations,Distressed Mortgage Markets and the Housing Wealth Effect

Using a unique combination of regulatory and survey microdata, we examine the importance of the life cycle theory of consumption in estimating housing wealth effects for the Irish mortgage market. Since the recent financial crisis, this market has experienced substantial house price declines and negative equity. Thus, house price expectations are likely to be important in influencing housing wealth effects. We find a positive correlation between consumption and changes in housing wealth among our sample of mortgaged Irish households. Furthermore, we find that this positive association only exists when housing wealth changes are perceived to be of a permanent nature.     

Rational Expectations, Market Fundamentals and Housing Price Volatility

This paper derives a forward-looking rational expectations house price model and empirically tests its ability to explain short-run fluctuations in real house prices. A novel approach to proxying the imputed rents of owner-occupied housing, as a function of observable housing market fundamentals, is combined with a housing market arbitrage relation to derive a present value model for real house prices. Tests of the rational expectations, nonlinear cross-equation restrictions reject the joint null hypothesis of rational expectations and the asset-based housing price model for quarterly, single-detached house prices in the city of Vancouver, British Columbia from 1979–1991. The model fails to fully capture observed house price dynamics in two real estate booms but tracks real house prices well in less volatile times, suggesting that prices may temporarily deviate from fundamental values in real estate price cycles.     

Housing Attributes Associated with Capital Gain

Housing units are heterogeneous goods. Rates of change in housing prices are typically modelled as if they arise from factors unrelated to the housing unit itself. For example, housing price increases in the latter part of the 1970s and early 1980s are argued to have arisen primarily from demographic factors and the differential effects of inflation on the effective rate of taxation on income from corporate capital and on owner-occupied housing. Cross-sectional variation in price inflation is not addressed. Consumers who purchased housing units are not indifferent to their attributes. To the extent that expectations vary within regional housing markets as a consequence of variation in housing attributes, standard linear hedonic price regression may generate biased estimates of implicit prices. This paper identifies sufficient conditions for the estimates of implicit prices in linear hedonic price regressions to be unbiased and generate unbiased estimates of implied price changes. Finally, this paper identifies living space (house size) as a significant attribute related positively to the increase in individual housing prices in a regional market.     

Is Timing Everything? Race,Homeownership and Net Worth in the Tumultuous 2000s

We use the Panel Study of Income Dynamics to estimate how net worth was affected among low‐ and moderate‐income households who became first‐time homebuyers at different points during the volatile 2000s. We address selection using propensity score matching and estimating difference‐in‐difference models, and use quantile regressions to account for the skew in net worth outcomes. Results highlight the significance of race in the relationship between first‐time home buying and net worth during the decade. Although timing was critical to the short‐term trajectory of net worth for whites, total net worth declines for black first‐time homebuyers regardless of economic climate. The most dramatic differences between black and white new homebuyers is their neighborhood locations, with blacks purchasing in predominantly black neighborhoods with lower housing prices and price appreciation, and lower and declining rates of homeownership.     

Borrower Attitudes Toward Alternative Mortgage Instruments*

Much of the existing literature on homeownership assumes that financial markets work well enough to allow households to translate permanent income into effective demand. However, transaction costs, imperfections, and uncertainties all constrain the markets' operation so that people are often forced to choose a quantity of housing stock that diverges from their desired consumption level. Instead of being able to borrow against future income for the down payment or to make monthly payments in a pattern that matches future income, young families in their early years may be constrained from purchasing the size house they desire, and older households may remain in homes larger than they need. In light of these market imperfections, housing and tenure decisions depend not only on permanent income and the relative price of housing services, but also on such mortgage parameters as monthly payment patterns, down payment, and rate of equity accumulation. Models of the demand for housing and homeownership described in the existing literature do not include these parameters of mortgage finance. Mortgage terms are important factors in housing consumption and investment decisions. Because the standard mortgage no longer seems appropriate for all households under all economic conditions, the extent to which alternative mortgage instruments meet the requirements and preferences of different segments of the market becomes an important issue.     

Housing Costs and the Elderly

Estimates are made of changes in average housing costs and average family incomes for non-moving elderly homeowners and renters over the period 1972–80. Findings suggest that: rental costs are higher in each time period than are homeownership costs; evidence of serious deterioration in affordability of housing is weak, when looking at aggregate price/income ratios; and it is clear that elderly renters are more seriously disadvantaged in housing affordability than are elderly homeowners at every time period.     

Clientele Effects on the Demand For Housing Price Appreciation

If house buyers are segmented by income, one might expect to observe buyers in such markets valuing the benefits of expected capital gain differently. Presumably, individuals experiencing higher marginal tax rates should be inclined to pay relatively more for anticipated capital gain since the opportunities of sheltering such income from taxation are greater. This paper attempts to identify a proxy for expected capital gain by using the hedonic price methodology to predict a recent price series for each housing unit in a sample of sales. That proxy is then used to determine an individual buyer's marginal willingness to pay for anticipated price appreciation. The results indicate that one cannot reject the joint hypothesis that homebuyers naively extrapolate from prior implied price performance to establish future price expectations and the variation in willingness to pay for that expectation may be a function of the buyer's income. This suggests the existence in housing markets of a phenomenon termed the clientele effect. This effect has been the subject of considerable examination in the finance literature.