Consumption Of Housing Services Research Articles

Health shock risk, critical illness insurance, and housing services

This paper studies a consumption–investment problem involving health shock risk, perishable consumption, and consumption of housing services. Additionally to a risk-free asset and a stock index, the agent can invest in real estate. I analyze the impact of health shocks on the optimal consumption and investment decisions in model specifications with and without the possibility to buy critical illness insurance. I discuss the influence of critical illness insurance on the optimal strategy and analyze the drivers of the optimal critical illness insurance demand. The results indicate that health shock risk has potentially devastating consequences, especially for young agents. It turns out that critical illness insurance is an excellent instrument for hedging health shock risk and for consumption smoothing across different health states. Optimal critical illness insurance demand is decreasing in financial wealth and increasing in human wealth. Real estate prices have a minor influence on optimal critical illness insurance demand.

The Risk of Job Loss, Household Formation and Housing Demand: Evidence from Differences in Severance Payments

Recent cohorts in various developed countries take a longer time to form their own household and display lower rates of home ownership than older cohorts. Previous literature has linked these developments to higher job instability, especially among youths. We exploit the large differences in firing costs across contract types in the Spanish labor market to identify the causal link between sharp changes in the risk of job loss and the timing of different forms of household formation among youths. Our identification strategy uses variation in regional incentives for firms to promote high firing cost contracts between 1997 and 2009. Using data from the 2002-2014 waves of the Spanish Survey of Household Finances, we document that an increase of 1% in the stock of workers with an open-ended contract increases the probability of forming a new household by a similar magnitude (especially through renting new accommodation). The results are consistent with the predictions of precautionary saving models, whereby individuals exposed to the risk of job loss postpone their consumption of housing services.

Asset Prices, Local Prospects and the Geography of Housing Dynamics

I uncover a novel link between economic fundamentals and real estate returns. First, using a measure of (i.e. MSA) growth prospects from both industry level employment and financial data, I am able to explain a substantial portion of variability in excess real estate returns and price-to-rent ratios. A one standard deviation decline in local growth prospects is associated with a 120bp drop in the housing risk premia and a 500bp increase in the price to rent ratio. Second, I establish the underlying dynamics of relative, housing versus non-housing, consumption in the MSA-level cross section of economic agents. I document that a one standard deviation decline in local growth prospects is associated with a 1000bp rise in level and 700bp decrease in variance of relative consumption. In contrast, a one standard deviation increase in local growth prospects is also associated with a rise in relative consumption. This suggests that housing acts as a hedge against long-run economic growth. I then investigate these empirical facts through the lens of a consumption based, asset pricing model. I combine a persistent component in consumption, Epstein and Zin (1989) preferences, and nonseparable consumption of non-housing goods and housing services. Consumption of housing services provides a hedge to long-run growth prospects. The model is able to replicate the excess returns and price to rent ratio regression results from the data.

“Phasic” metropolitan settlers: a phase-based model for the distribution of households in US metropolitan regions

In this article, we develop a model for explaining spatial patterns in the distribution of households across metropolitan regions in the United States. First, we use housing consumption and residential mobility theories to construct a hypothetical probability distribution function for the consumption of housing services across three phases of household life span. We then hypothesize a second probability distribution function for the offering of housing services based on the distance from city center(s) at the metropolitan scale. Intersecting the two hypothetical probability functions, we develop a phase-based model for the distribution of households in US metropolitan regions. We argue that phase one households (young adults) are more likely to reside in central city locations, whereas phase two and three households are more likely to select suburban locations, due to their respective housing consumption behaviors. We provide empirical validation of our theoretical model with the data from the 2010 US Census for 35 large metropolitan regions.

Housing policy as a factor of industrial region sustainable development

The article is devoted to the key features of housing policy implementation in the industrial regions of Ukraine. Housing assessment, provision of shelter as well as amount of investments into real estate construction has been performed. A significant regional disparity in the implementation of housing policy has been detected by the author. It is proved that increased negative trends in solving the housing problem in the industrial regions inhibits increase the level and quality of life and slows the formation and the usage of social sustainable development potential.Highlight priority areas of housing policy in the industrial regions including: improving the housing provision and quality of housing and communal services, ensuring the safe living conditions and consumption of housing services, creating the conditions for citizens to take an active part in the housing policy implementation. Priority activities for regional social-economical development strategies improvement up to year 2020 have been proposed.

A Pure Theory of Metropolitan Redistribution Patterns: Modifications Upon Tiebout's Model

Tiebout’s (1956) theory about redistribution of population and the bundle of public goods, ever since, has been a major reference for many of recent endeavors to explain spatial redistribution patterns in metropolitan areas. In this paper, based on Tiebout’s rationale and by proposing major modifications on how his hypothesis would work better, I developed a theory of metropolitan redistribution patterns that improves conceptualization of current residential patterns in metropolitan areas. The theory clarifies that households do not relocate to solely maximize their locational utility, but rather residential mobility across metropolitan areas is an outcome of continuous adjustments in consumption of housing services and location of residence over the course of households’ lifecycles. Based on this theory, the discussion section provides a monocentric conceptual model and a multi-centric GIS-based model of population redistribution patterns that to further verify the validity of the hypothesis.

REVENUE COSTS AND INCENTIVE EFFECTS OF THE MORTGAGE INTEREST DEDUCTION FOR OWNER-OCCUPIED HOUSING

We analyze how changes in the income tax deduction for home mortgage interest would affect loan-to-value ratios on owner-occupied homes, the distribution of income tax liabilities, and the consumption of housing services. Using the 2004 Survey of Consumer Finances, we estimate that repealing the mortgage interest deduction in 2003 would have raised federal and state income tax revenues by $72.4 billion in the absence of any household portfolio adjustments, but by only $58.5 billion if homeowners drew down financial assets to pay down their mortgage debt.

Housing as a Measure for Long-Run Risk in Asset Pricing

I evaluate the effects of long-run consumption growth risk and housing consumption risk on asset prices. Current asset values are affected by the risk-return tradeoff in the long-run. Housing plays an important role in the economy. As an asset, it is particularly sensitive to long-run risk-return trade off; as a consumption component, it accounts for one fifth of the total expenditures in non durable goods and services. The investment horizon for housing is usually distant in the future. Investors fear shocks that can affect the value of their house for a long period of time. Such shocks affect substantially the services obtained from the house and its price as an asset as well. I use a nonseparable utility function with non-housing consumption and consumption of housing services, which generates an intertemporal composition risk, besides the traditional consumption growth risk. The composition risk has effects for the valuation of cash flow growth fluctuations far into the future due to the persistence of consumption growth. I provide a closed form solution for the valuation function despite the non-separability. This allows me to quantify the price of risk in the long-run with inputs from vector autoregressions. I evaluate the different exposure to long-run risk of a cross section of portfolios of securities and characterize the price of risk for different investment horizons. The model also explains the spread of the returns to different portfolios sorted by book to market and housing returns, at different investment horizons.

Owner-Occupied Housing and the Composition of the Household Portfolio

For most homeowners, the house is the single most important consumption good appearing as an argument of the utility function, and, at the same time, the dominant asset in the portfolio. This paper uses a mean-variance efficiency framework to examine the household’s optimal portfolio problem when owner-occupied housing is included in the list of available assets. Housing differs from stocks and bonds in a crucial way: since the household’s ownership of residential real estate determines the level of its consumption of housing services, the household’s demand for real estate is “overdetermined” in the sense that the level of real estate ownership which is optimal from the point of view of the consumption of housing services may differ from the optimal level of housing assets from a portfolio point of view. With rental markets for housing, a household can, in principle, divorce the size of its holdings of real estate assets from the level of housing services it consumes. However, rental housing is by no means a perfect substitute for owner-occupied housing. We assume, instead, that the preferential tax treatment of owner-occupied housing and the transactions costs and agency costs involved in the rental market for housing create frictions large enough to effectively constrain the household to include in its asset portfolio the level of housing consistent with its consumption of housing services. The paper focuses on the impact of the portfolio constraint imposed by the consumption demand for housing on the household’s optimal holdings of financial assets. Section II of the paper is similar in spirit to a recent paper by Jan K. Brueckner (1997), which analyzes the interaction between the consumption demand and the investment demand for housing in a mean-variance portfolio model. Brueckner considers a general covariance matrix and mean vector of returns and a general utility function, and derives analytical results. In contrast, our implementation of the meanvariance framework is quantitative. That is, we estimate the covariance matrix and vector of expected returns for housing and financial assets and solve for the efficient frontiers and optimal portfolios numerically. The risk characteristics of housing are estimated using two distinct sources: data from the Panel Study of Income Dynamics (PSID) and data from Karl E. Case and Robert J. Shiller (1989) based on repeat sales transactions prices for four U.S. cities. Both data sources indicate that housing prices have a large idiosyncratic component; the standard deviation of the return to housing, at the level of the individual house, is about 0.14. In addition to housing, the portfolio can include nonnegative amounts of Treasury bills, Treasury bonds, and stocks. The household can borrow only in the form of a mortgage, which is limited to 100 percent of the value of the house. Using the estimated vector of expected returns and covariance matrix of asset returns, we plot the constrained meanvariance efficient frontiers for various values of the household’s ratio of house value to wealth, h (the “housing constraint”). The housing constraint has an enormous effect on the risk and return trade-off available to the household. Young households, which typically have large holdings of real estate relative to their net worth, are highly leveraged and therefore forced into a situation of high risk (and return). As a result, these young households have a strong incentive to reduce the risk of their portfolio by using their net worth to either pay down their * Flavin: Department of Economics, University of California, San Diego, CA 92093, and National Bureau of Economic Research (e-mail: mflavin@ucsd.edu); Yamashita: Department of Economics, University of Nevada, Las Vegas, NV 89154 (e-mail: tyamashi@ccmail.nevada.edu). We thank Elena Bisagni, Jan Brueckner, Wouter den Haan, James Hamilton, Bruce Lehmann, Greg Mankiw, and the referees for comments, and Robert Shiller for providing the house price transactions data. 1 The implications of the dual role of housing (as both a consumption good and an investment good) for tenure decisions of households were first analyzed by J. Vernon Henderson and Yannis M. Ioannides (1983).

Seasonal Housing Markets: The Pilgrimage to Mecca

This paper sets up a model of housing markets with a seasonal peak in demand. Rent levels, rent gradients, consumption of housing services, and the spatial distribution and density of population are derived for peak and off-peak periods under conditions of intertemporal locational equilibrium and spatial market equilibrium. The model is empirically applied to the city of Makkah (Mecca) in Saudi Arabia, where during the annual pilgrimage the resident population trebles and housing expenditure increases six times.

The Welfare Cost of Hong Kong's Public Housing Programme

Public housing is an important source of accommodation in Hong Kong. Subsidies to public housing are tied to the consumption of housing services. Consumer's consumption pattern will therefore be distorted, and a welfare loss incurred as compared to an equivalent cash transfer. This paper seeks to measure the extent to which tenants' benefit from public housing subsidies. A measure of net tenant benefit is used, which is based upon the Marshallian consumer surplus concept. The results indicate that Hong Kong's public housing programme has had a significant impact upon households' consumption patterns, and that the welfare loss is relatively low.

Changes in the Consumption of Housing Services: The Gary Experiment

Changes in the Consumption of Housing Services: The Gary Experiment