Estimating the demand for housing characteristics: A survey and critique

Many economists criticize the concept of the composite commodity'of housing that forms the basis of modern urban economics. As a result, much empirical work has been produced that attempts to estimate the household demand for housing and locational characteristics. The purpose of this paper is to take stock of the literature. The theoretical foundations of the literature and the econometric procedures employed are analyzed and critiqued. In addition, the empirical results are examined in order to identify any patterns that exist. The principal conclusion of this survey is that the theoretical basis is sound, but the econometric applications leave much to be desired. One consequence is that the literature has produced few empirical regularities. Another is that more studies using better estimation procedures and better data are needed before it can be safely argued that the composite commodity concept is replaced by the characteristics approach.     

An Examination of Mortgage Debt Characteristics and Financial Risk among Multifamily Properties

Using the 1996 Property Owners and Managers Survey (POMS), the authors (1) examine the mortgage debt characteristics of multifamily properties; (2) estimate the size and potential for growth of the multifamily mortgage debt market; and (3) examine the financial characteristics of multifamily properties, each with particular attention to differences by property size. While the authors find that the POMS suffers from severe missing value problems, their analysis indicates large differences in the likelihood that a property has a mortgage, the interest rate conditional on having a mortgage, and indicators of financial distress among properties of different size. They also find that smaller properties, with large potential for growth in multifamily mortgage lending, have much higher concentrations of low- to moderate-income tenants but that larger properties provide the bulk of units that serve these renters.     

Microfoundations of a mortgage prepayment function

This article focuses on the following question: how much of an interest rate decline is needed to justify refinancing a typical home mortgage? Modern option pricing theory is used to answer the question; this theory indicates that the answer depends upon several factors, which include the volatility of interest rates and the expected holding period of the borrower. The analysis suggests that the commonly espoused “rule of thumb” refinance if the interest rate declines by 200 basis points — is a fair approximation to the more precisely derived differential for many households. We also construct the prepayment behavior of a pool of mortgages in which the expected holding periods of the borrowers in the pool vary. The prepayment behavior of this simulated pool is used to generate a series of empirically testable hypotheses regarding the likely shape of an actual prepayment function and its determinants. Finally, actual prepayment data are used to estimate a hazard function that explains prepayment behavior. We find that the estimated model understates prepayment behavior relative to that predicted by the simulation model, which suggests that the simple option pricing model is not adequate to explain aggregate prepayment behavior.     

Tax expenditures and other programs to stimulate housing: Do we need more?

Discussions to aid the housing industry raise several questions. First, does stimulation of housing demand require new direct subsidy programs? And, second, are any programs to increase demand worth their costs to society? The results in this paper indicate that the answer to both questions is no: the existing subsidy to homeownership in the tax code is, when combined with mortgage instruments that offset cash flow problems, fully capable of generating large increases in demand at the cost of significant tax expenditures; and the social benefits of increased housing demand are shown to be worth only about 60% of their costs. Consequently, increasing housing demand can be readily achieved, but doing so will be costly to the government and inefficient for society.     

How Well Do Section 8 FMRs (Fair Market Rent) Match the Cost of Rental Housing? Data from Thirty-Nine Large Cities

The FMR (Fair Market Rent) idea was built into the Section 8 lower income rental assistance program to provide a means to reflect variations in the rental cost of comparable housing in different market areas and also rental cost differences within a market area due to size variations in housing units. Does the FMR schedule for the Section 8 Existing Housing Program parallel the actual differences in the rents of comparable housing among metropolitan areas? We find the 1975 schedule fulfills some of the criteria for an efficient and equitable Section 8 Existing Housing Program but not all.     

An Evaluation of Hedonic Price Indexes for Thirty-four Large SMSAs

The purpose of this paper is twofold. First, a set of price indexes are developed for thirty-four metropolitan areas for the years 1975 and 1978. Indexes are also broken down by central city and suburb for twenty two of the metropolitan areas. These indexes measure variation in the price per unit of owner-occupied housing stock and the price per unit of housing services of rental housing. Confidence intervals are constructed for the price indexes. It is found that the indexes are reasonably precise measures in that the typical ratio of the confidence interval to the predicted median rent or value is about 13%. Also, analysis of the confidence intervals indicates substantial and statistically significant variation in the price of housing stock and services among the metropolitan areas studied. One of the major benefits of this set of indexes is that it can be used to address one of the most important questions in real estate — Why do housing prices and rents vary among metropolitan areas and over time? Research projects are currently underway that use the data to address these two questions.     

The flight to the suburbs: insights gained from an analysis of central-city vs suburban housing costs

The central thesis of this paper is that the prices people pay for housing can be used to determine whether the movement of population to the suburbs is caused primarily by attraction to suburban advantages or by the desire to escape deteriorating conditions in the central city. Estimates of the coefficients indicating the price of central city versus suburban housing in the United States are presented and analyzed using a regression model.     

Housing crowding in developing countries and willingness to pay for additional space: The case of Korea

The very rapid rates of urban population growth in developing countries is placing great strain on their housing stock. Housing policies which are aiming at reducing or eliminating crowding are generally based on notions of ‘needs’ and ‘standards of adequacy’ which are more often based on arbitrarily selected criteria than on domestic economic conditions. The aim of this paper is to evaluate the willingness to pay for the additional housing space by households and the validity of target housing standards. The three methods used show consistently that — at least in Korea — the willingness to pay for additional space is less than 25 percent of the value of an extra unit of space, everything else being equal.     

Mortgage Choice†

Mortgage choice refers to a set of problems faced by a homeowner that includes the choice of a loan-to-value ratio, the refinancing and default decisions, and the choice of mortgage instrument. This paper reviews much of the literature that has been written on the topic. It begins with a listing of the major stylized facts the literature seeks to explain. Models used to explain mortgage choice are categorized and discussed. It is argued that the relatively simple certainty model that incorporates liquidity constraints seems capable of explaining some of the stylized facts, but is unable to explain some others. The paper concludes with a discussion of three policy questions that require a better understanding of mortgage choice before they can be answered. The paper is based upon the author's Presidential Address to the American Real Estate and Urban Economics Association, which was delivered in Atlanta, Georgia on December 29, 1989.     

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.