User Cost, Home Ownership and House Prices: United States

Abstract

From 1995 to the beginning of the subprime crisis, there was a substantial rise in real house prices and an increase in homeownership rates in the United States. To understand this phenomenon, we consider changes to the cost of homeownership over the period. The cost of owner-occupied housing services is measured by the user cost of housing, which depends not only on house prices but also on the preferential tax treatment of owner-occupied housing services, the availability of collateralised credit, the insurance role of owner-occupied housing against rental–price risk, and current and expected transaction costs. We then estimate the user cost of owner-occupied housing using US data and show that it did not increase during the years of the price upsurge, which might explain the observed homeownership pattern. We also discuss possible factors that might explain the coexistence of rising housing prices and increasing homeownership rates.