Self-Selection in the Fixed-Rate Mortgage Market

This paper analyzes the effect of information asymmetry between the lender and the borrower (i.e., the borrower knows how long he will reside in his home, whereas the lender does not) on the borrower's choice among the interest rate-discount points combinations available in the fixed-rate mortgage market. The analysis shows that if the rate-points trade-off of the mortgage menu is either too steep or too flat, then all types of borrowers will choose the same loan contract from the menu. In addition, if the rate-points trade-off is not convex to the origin, then only the contracts with extreme rate-points combinations will be chosen by borrowers; all contracts with intermediate rate-points combinations are redundant and will not be chosen by any borrowers. Intermediate rate-points combination mortgage contracts would be chosen by some borrowers only if the mortgage menu were to provide a self-selection function. Several necessary conditions of a self-selection mortgage menu are depicted. Copyright American Real Estate and Urban Economics Association.

The Variation of Homeowner Tax Preferences by Income, Age and Leverage

It is well known that owner-occupied housing has long received favorable tax treatment in the U.S. federal income tax system relative to a system in which all income, regardless of its source, is subject to taxation. As a result, many economists have argued that the United States overinvests in owner-occupied housing relative to the investment that would result from a neutral income tax system. In addition, the distribution of the subsidy is often viewed as inequitable because high-income households receive the largest subsidy per dollar of housing. This article uses the 2005 American Housing Survey, conducted by the U.S. Department of Commerce, to perform a microlevel analysis of the current magnitude and distribution of homeowner tax preferences. We then assess how the magnitude and distribution of tax preferences would be altered by replacement of the mortgage interest deduction with a 15% credit. Copyright 2007 American Real Estate and Urban Economics Association

The Borrower's Choice of Fixed and Adjustable Rate Mortgages in the Presence of Nominal and Real Shocks

This paper concerns the conditions under which borrowers select fixed and adjustable rate mortgages. The novelty of the paper lies in its capability to analyze the effect of nominal and real shocks separately. The fixed rate mortgage (FRM) versus the adjustable rate mortgage (ARM) choice is determined by the expected real interest rate differential, initial wealth, income, expected real and nominal income risk exposure-measured by different parameters-the value of the house, the appreciation of the house and the influence of the variance of nominal and real shocks. Results differ according to whether or not borrowers are restricted by the loan-to-value constraint. Copyright American Real Estate and Urban Economics Association.

Tax Structure and Natural Vacancy Rates in the Commercial Real Estate Market

A number of studies have postulated that the Economic Recovery Tax Act of 1981 (ERTA 1981) was responsible for the dramatic overbuilding that occurred between 1981 and 1986, primarily because returns became less sensitive to "real" demand. While there has been much research on how equilibrium or "natural" vacancy rates in the real estate market are determined, beginning with Rosen and Smith's seminal paper in 1983, virtually none of this work has dealt with the impact of the tax environment. This study makes an initial attempt to answer this question with respect to equilibrium vacancies resulting from tenant (or owner) turnover. A formal model is developed that considers as an objective function the landlord's desire to maximize his/her after-tax equity returns in an environment of monopolistic competition in which individual projects face downward-sloping demand curves, owing to market conditions and a degree of heterogeneity among tenants in search costs or some other characteristic. The natural vacancy rate is shown not to depend directly upon the tax environment, but to depend indirectly upon it only to the extent that equilibrium market rents are lowered. The nature of the vacancy response depends critically upon the shape of the tenant demand response relationship upon its transition to a lower-rent region. This response is interactive with the degree of turnover and supply responsiveness within individual markets. Copyright 2003 by the American Real Estate and Urban Economics Association