Accounting for changes in the homeownership rate

After three decades of being relatively constant, the homeownership rate increased over the period 1994 to 2005 to attain record highs. The objective of this paper is to account for the observed boom in ownership by examining the role played changes in demographic factors and innovations in the mortgage market which lessened downpayment requirements. To measure the aggregate and distributional impact of these factors, we construct a quantitative general equilibrium overlapping generation model with housing. We find that the long-run importance of the introduction of new mortgage products for the aggregate homeownership rate ranges from 56 and 70 percent. Demographic factors account for between 16 and 31 percent of the change. Transitional analysis suggests that demographic factors play a more important, but not dominant, role the further away from the long-run equilibrium. From a distributional perspective, mortgage market innovations have a larger impact explaining participation rate changes of younger households, while demographic factors seem to be the key to understanding the participation rate changes of older households. Our analysis suggests that the key to understand the increase in the homeownership rate is the expansion of the set of mortgage contracts. We test the robustness of this result by considering changes in mortgage financing after World War II. We find that the introduction of the conventional fixed rate mortgage, which replaced balloon contacts, accounts for at least fifty percent of the observed increase in homeownership during that period.Home ownership ; Mortgage loans

Equilibrium mortgage choice and housing tenure decisions with refinancing

The last decade has brought about substantial mortgage innovation and increased refinancing. The objective of the paper is to understand the determinants and implications of mortgage choice in the context of general equilibrium model with incomplete markets. The equilibrium characterization allows us to study the impact of mortgage financing = decisions in the productive economy. We show the influence of different contract characteristics such as the downpayment requirement, repayment structure, and the amortization schedule for mortgage choice. We find that loan products that allow for low or no downpayment or an increasing repayment schedule increase the participation of young and lower income households. We find evidence that the volume of housing transactions increase when the payment profile is increasing and households have little housing equity. In contrast, we show that loans that allow for a rapid accumulation of home equity can still have positive participation effects without increasing the volatility of the housing market. The model predicts that the expansion of mortgage contracts and refinancing improves risk sharing opportunities for homeowners but the magnitude varies with each contract.Mortgage loans ; Housing - Finance

Mortgage innovation, mortgage choice, and housing decisions

This paper examines some of the more recent mortgage products now available to borrowers. The authors describe how these products differ across important characteristics, such as the down payment requirement, repayment structure, and amortization schedule. The paper also presents a model with the potential to analyze the implications for various mortgage contracts for individual households, as well as to address many current housing market issues. In this paper, the authors use the model to examine the implications of alternative mortgages for homeownership. The authors use the model to show that interest rate-adjustable mortgages and combo loans can help explain the rise-and fall-in homeownership since 1994.Mortgages

The tax treatment of homeowners and landlords and the progressivity of income taxation

This paper analyzes the connection between the asymmetric tax treatment of homeowners and landlords and the progressivity of income taxation using a quantitative overlapping generations general equilibrium model with housing and rental markets. Our model emphasizes the determinants of tenure choice (owning versus renting) and the household decision to supply housing services to the rental market. This formulation breaks the link between the rental price and the equilibrium interest rate. Hence, the aggregate supply of rental property responds differently to the direction of rental price changes, marginal tax rate changes, and maintenance cost changes. We show that the model replicates the key factors and the distributional patterns of ownership, house size, and landlords. The degree of progressivity in the income tax code has important implications for housing tenure and housing consumption. We find that a movement toward a less progressive income tax code can generate sizable increases in homeownership and welfare that result from the equilibrium effects and a portfolio reallocation mechanism absent in economies with single assets (e.g., Conesa and Krueger 2006). We find that the removal of existing asymmetries in the tax code has effects on housing that differ from those reported in the literature. We show that housing policy can increase the ownership rate of a particular segment of the population but generate nontrivial distributional costs. The welfare increases are no larger than those found when the progressivity of the tax code is reduced.Home ownership ; Taxation

The tax treatment of homeowners and landlords and the progressivity of income taxation

This paper analyzes the connection between the asymmetric tax treatment of homeowners and landlords and the progressivity of income taxation using a quantitative overlapping generations general equilibrium model with housing and rental markets. Our model emphasizes the determinants of tenure choice (own vs. rent) and the household decision to supply housing services to the rental market. This formulation breaks the link between the rental price and the equilibrium interest rate and, hence, the aggregate supply of rental property responds differently to the direction of rental price changes, marginal tax rate changes, and maintenance cost changes. We show that the model replicates the key factors and the distributional patterns of ownership, house size, and landlords. The degree of progressivity in the income tax code has important implications for housing tenure and housing consumption. We find a movement toward a less progressive income tax code can generate sizeable increases in homeownership and welfare that result from the equilibrium effects and a portfolio reallocation mechanism absent in economies with a single asset (i.e. Conesa and Krueger (2006)). An examination of the removal of existing asymmetries in the tax code are found to have effects on housing that differ from those reported in the literature. We show that housing policy can increase the ownership rate of a particular segment of the population, but generate nontrivial distributional costs. The welfare increases are no larger than those found when the progressivity of the tax code is reduced.Home ownership ; Taxation

The loan structure and housing tenure decisions in an equilibrium model of mortgage choice

The objective of this paper is to understand how loan structure affects (i) the borrower’s selection of a mortgage contract and (ii) the aggregate economy. We develop a quantitative equilibrium theory of mortgage choice where households can choose from a menu of long-term (nominal) mortgage loans. The model accounts for observed patterns in housing consumption, ownership, and portfolio allocations. We find that the loan structure is a quantitatively significant factor in a household’s housing finance decision. The model suggests that the mortgage structure preferred by a household is dependent on age and income and that loan products with low initial payments offer an alternative to mortgages with no downpayment. These effects are more important when inflation is low. The presence of inflation reduces the real value of the mortgage payment and the outstanding loan overtime reducing mobility. Changes in the structure of mortgages have implications for risk sharing.Mortgage loans

Recent trends in homeownership

The homeownership rate began to trend upward in 1995 after years of being relatively constant, near 64 percent. This article describes recent changes in the share of U.S. housing that is owner-occupied and explores the reasons for the surprising rise over the past decade. Explanations that have been offered include demographics, low mortgage rates, changes in housing policy, and innovations in the mortgage financial market. Of all these explanations, the most plausible one is that innovations in the financial markets increased access to mortgage finance, mainly by reducing downpayment constraints and allowing younger people to buy homes.Home ownership

Equilibrium mortgage choice and housing tenure decisions with refinancing

The last decade has brought about substantial mortgage innovation and increased refinancing. The objective of this paper is to understand the determinants and implications of mortgage choice in the context of a general equilibrium model with incomplete markets. The equilibrium characterization allows us to study the impact of mortgage financing decisions in the productive economy. We show the influence of different contract characteristics such as the down payment requirement, repayment structure, and the amortization schedule for mortgage choice. We find that loan products that allow for low or no down payment or an increasing repayment schedule increase the participation of young and lower-income households. We find evidence that the volume of housing transactions increases when the payment profile is increasing and households have little housing equity. In contrast, we show that loans that allow for a rapid accumulation of home equity can still have positive participation effects without increasing the volatility of the housing market. The model predicts that the expansion of mortgage contracts and refinancing improves risk sharing opportunities for homeowners, but the magnitude varies with each contract.

Accounting for changes in the homeownership rate

After three decades of being relatively constant, the homeownership rate increased over the 1994–2005 period to attain record highs. The objective of this paper is to account for the observed boom in ownership by examining the role played by changes in demographic factors and innovations in the mortgage market that lessened down payment requirements. To measure the aggregate and distributional impact of these factors, we construct a quantitative general equilibrium overlapping-generation model with housing. We find that the long-run importance of the introduction of new mortgage products for the aggregate homeownership rate ranges from 56 percent to 70 percent. Demographic factors account for between 16 percent and 31 percent of the change. Transitional analysis suggests that demographic factors play a more important but not dominant role farther from the long-run equilibrium. From a distributional perspective, mortgage market innovations have a larger impact on participation rate changes of younger households, and demographic factors seem to be the key to understanding the participation rate changes of older households. Our analysis suggests that the key to understanding the increase in the homeownership rate is the expansion of the set of mortgage contracts. We test the robustness of this result by considering changes in mortgage financing after World War II. We find that the introduction of the conventional fixed-rate mortgage, which replaced balloon contracts, accounts for at least 50 percent of the observed increase in homeownership during that period.