Cost Of Homeownership Research Articles

Foreign Ownership of U.S. Safe Assets: Good or Bad?

The last 20 years have been marked by a sharp rise in international demand for U.S. reserve assets, or safe stores-of-value. We argue that these trends in international capital flows are likely to be a boon for some (by a lot) but a bane for others (by less). The young benefit from a capital inflow due to lower interest rates, which reduce the costs of home ownership and of borrowing against higher expected future income. Middle-aged savers are hurt because they are crowded out of the safe bond market and exposed to greater systematic risk in equity and housing markets. Although they are partially compensated for this in equilibrium by higher risk premia, they still suffer from lower expected rates of return on their savings. By contrast, retired individuals, who are drawing down assets and who receive social security income that is least sensitive to the current aggregate state, benefit handsomely from the higher asset values that accompany a capital inflow. In some states, the youngest working-age households and the oldest retired households would be willing to give up 1.5-1.7% of lifetime consumption in order to avoid just one year of a typical annual decline in foreign holdings of the safe asset. Middle-aged households could benefit from an outflow, but they do so by an amount that is typically one-tenth of the magnitude of the losses to the youngest and oldest households. Under the veil of ignorance, a newborn would be willing to give up over 11% of lifetime consumption to avoid a large capital outflow.

The Risk and Return of Home Ownership

In several countries the economic crisis has again confronted homeowners with the risks of their ownership. Price-increases are not self-evident. The uncertainty of the costs of home ownership has increased. We will present a stochastic model by which the costs and risks of home ownership will be determined simultaneously. The costs of home ownership consist of two components: the difference between the buying price plus transaction costs at the start of the occupation period and the selling price at the end of the occupation period; and the home ownership related cash flows during the occupation. An important risk factor is the difference between the expected price-increase of the house and the uncertain actual price development during the occupation period. Other risks are for instance the uncertainty of the inflation influencing maintenance and the uncertainty of the future costs of refinancing the debt. We will determine those risks with a stochastic analysis, also taking into account the correlation between house price increases, inflation and the interest rate. The levels of the costs are amongst others dependent on the amount of own funds invested in the house and the length of the occupation period in the house. We show that just looking at the volatility of house prices underestimates the true risk of owner occupation, especially for longer occupation periods and with high initial loan-to-value ratios.

Intercity Rent Differentials in the U.S. Housing Market 2000: Understanding Rent Variations as a Sociological Phenomenon

ABSTRACT:This study extends the intercity rent differentials investigation by Gilderbloom and Appelbaum (1988) in relatively independent housing markets to see how it can be replicated using U.S. census data from the year 2000 against the 1970 and 1980 models with the addition of several new variables to measure its impact on intercity rents. We find that region, race, and climate no longer explain rent differentials in 2000 as it did in the 1980 research, while affirming that a large percentage of old houses and small mom-and-pop landlords causes rents to fall. We find that both the cost of homeownership and the level of household income remain critical factors in explaining the level of median rent across cities. We also find a strong correlation between cities with extensive anti-war activity in the late 1960s and same sex households having higher rents, although more research needs to be done before we argue a causal relationship. We contend that sociology needs to be put back into the equation in order to understand how rents vary from city to city. Our explanation of rent variations adds a social dimension that most other researches miss. We also show how the amount of explanatory power is increased significantly by adding in a sociological dimension.

Reversing the Tide: Will State and Local Governments House the Poor as Federal Direct Subsidies Decline?

Problem: Most housing programs in the United States do not focus on the most pressing housing needs. In 2003 more than 13 million households spent at least half their incomes on rent or the costs of homeownership, an increase of more than 35% since 1993. The vast majority of these households were poor. Yet housing policy has shifted away from deep-subsidy programs targeted to the poorest households toward providing shallow subsidies to higher-income households. Purpose: This article considers whether, given that the federal government is unlikely to increase funding for low-income housing, state and local governments are likely to increase housing assistance to the lowest-income households in the future, how such assistance could be structured, and how states and localities might be persuaded or compelled to provide this assistance. Methods: We examine the income distribution of households supported by major programs administered by state and local governments and the extent to which these programs target the poor and provide them with sufficient levels of subsidy. We reviewed program data reported to funding agencies and trade associations, census data on housing problems compiled by the U.S. Department of Housing and Urban Development, and data from surveys of policies and practices conducted by academic researchers and policy organizations. Results and conclusions: We find that the shift to state and local administration of federal funds has not significantly shifted priorities. We provide evidence that states are not using their discretion go beyond federal requirements, and are not serving income groups below those they are required to serve. Locally funded programs are less likely to target the poor than state or federal programs. Takeaway for practice: Rather than hoping for substantial local housing assistance targeted to the poor, we recommend making more effective use of existing federal resources. Research support: None.

There's No Place Like Home

Elderly housing surveys consistently report that older Americans prefer to remain living in their homes for as long as they are physically able. This study uses hazard models to estimate the effects of family composition changes, health conditions, housing characteristics, and local policies and amenities on aging-in-place decisions by older homeowners in the 1972-1992 Panel Study of Income Dynamics. The empirical results show that increases in property taxes and utility costs, changes in family composition, and diminished physical well-being are negatively associated with aging in place. Increased home equity, greater financial resources, and stronger ties to the community are positively associated with aging in place. Taken together, these findings suggest that policies designed to reduce the user costs of homeownership or to enhance the functionality of elderly homeowners may facilitate aging in place.

Estimating User Costs and Rates of Return for Single-Family Residential Real Estate

This paper discusses the costs of home ownership and their potential impact on real estate returns. The simulations show that user costs can easily exceed the total of capital gains and imputed or ...

The Impact of Energy Efficient House Construction on Homeownership Costs: A Comparative Study in Gainesville, Florida

The goal of this study was to determine whether the Energy Star home program, as implemented in Gainesville, Florida, is reducing energy use and therefore costs relative to other homes and the extent of the savings. Analysis of Energy Star qualified houses found the savings were appreciable and statistically significant. The indicated energy savings for the average Energy Star household were $180 per year, which was capitalized to indicate a value increase of the average housing unit of $4,500 and the ability to afford a mortgage of $2,255 more than in the absence of the energy savings. The financial implications of these savings suggest that affordable housing policy needs to factor in continuing ownership costs in addition to the cost of the structure (the ‘first cost’) associated with purchasing a home. If the operating costs can be reduced, then the ability of a household to afford homeownership is improved.

The demand for housing in Spain: an endogenous switching regression analysis

Housing demand in Spain has been studied by using data disaggregated into primary and secondary housing demands. It is found that demand for both types of housing area, indeed, related and that they are both considered necessities; thus, suggesting that their consumption ought to be modelled as a joint decision. Moreover, it is found that traditional determinants of housing demand affect primary and secondary home demands differently. These differences are attributable to the following economic rationales: need for asset holdings diversifications, relative high cost of home ownership versus rental in choice locations, and differences in land demand intensity across regions. In sum, the findings suggest that policy makers in Spain, contrary to popular beliefs, must consider secondary homes an integral part of households' accommodation need.

Modelling structural change in the UK housing market: A comparison of alternative house price models

This paper develops a new approach to the modelling of house prices in the UK, with housing demand being conditioned directly on consumers' expenditure rather than the determinants of expenditure. Conditioning on consumption ensures that the permanent income measure used in determining the level of consumption is consistently reflected in housing demand. The effects of financial liberalisation on the relative consumption of housing and non-housing goods and services are captured using the average loan-value ratio for first-time buyers. We also allow for financial effects via the real user cost of home ownership. House prices are assumed to adjust so as to clear the housing market. The proposed model is found to have structurally stable parameters across the housing market downturn since 1990. Statistical comparisons with the more conventional models in use at HM Treasury and the Bank of England during the early 1990s provide additional evidence in favour of our proposed approach.

Tenements to bungalows: class and the growth of home ownership before ‘World War II’

ABSTRACTWhich social groups were moving into owner occupation in Britain before the Second World War is a matter of controversy, with opposing claims that this involved mainly white-collar or skilled manual workers. Although reliable figures showing the growth of home ownership in this period are rare, data are available for Edinburgh which indicate that tenure development in the city probably resembled that of England and Wales rather than the rest of Scotland. The relationship between income and the cost of home ownership is examined and this suggests that the main social group to move into owner occupation were probably white-collar workers. However, an analysis of occupational information from housing across a range of values in the city shows that this movement also affected manual workers and that there was a strong association between the proportions in each social class and the average rateable value of areas of housing.

A Note On Escalation Requirements, Cost-of-Living Comparisons, and Homeownership Costs

The correct procedure for indexing income transfers in social insurance programs such as social security depends on the escalation objective. In particular, implement ing the objective of maintaining the base period living standards of transfer recipients requires information on how the recipients' sources of income have changed as well as on changes in the cost of living. This article considers implementing this escalation objective for homeowners, to whom housing is a source of implicit income. In this situation, should homeowners be compensated for increases in living costs? The answer should, in part, depend on whether homeowners are fully hedged against increases in the cost of housing (when increases in housing costs are always fully offset by increases in potential rental income). The author argues that this hedging assumption is implacit in the "rental equivalence" approach to measuring housing costs for homeowners used in the consumer price index.

Regional Change in Middle Class Earnings and Standards of Living

ABSTRACTThis research examines key components of the broad national debate over the decline of the middle economic class of the United States at the regional level. Full‐time and part‐time workers’distributions of earnings among the low‐, middle‐ and upper‐earner groups are examined for the four major Census regions from 1967 to 1987. The premise is that the postwar boom era was a period in which the earnings of one full‐time worker could purchase a middle standard of living (using home ownership as a proxy) for a household. Thus, change in the purchasing power of full‐time earnings for home ownership is tracked between 1967 and 1987 at the regional level. In addition, regional changes in levels of fringe‐benefit recipiency are examined.Full‐time workers have seen a dramatic upwards shift in their earnings disiributions in all regions, accompanied by substantial erosion in their purchasing power. Earnings distributions across regions have converged, but the costs of home ownership have diverged. As a result, certain regions offer locational advantages for consuming the middle standard of living. Arising from these findings, this paper concludes with a set of questions for policymakers.

Segregation and Neighborhood Quality: Blacks, Hispanics, and Asians in the San Francisco Metropolitan Area

Segregation and Neighborhood Quality: Blacks, Hispanics, and Asians in the San Francisco Metropolitan Area

Estimating Homeownership Costs: Owners' Estimates of Implicit Rents and the Relative Importance of Rental Equivalence in the Consumer Price Index

This paper discusses the relative importance of Rental Equivalence (REQ) in the U.S. Consumer Price Index. A hedonic model of rents is estimated, and the resulting parameters are then used to compare hedonic estimates of implicit rents to homeowner estimates like those actually used to estimate the REQ expenditure weight. There are several reasons why hedonic estimates might be below actual implicit rents, and these effects are controlled for in the model. Owner estimates of implicit rents are then shown to be comparable to such hedonic estimates. Results support the method used to estimate the expenditure weight.

The Effects of Inflation-Induced Tax Increases on Stock and Housing Prices

This paper explores the contention that the dramatic increase in the real price of housing experienced during the 1 970s was a consequence of the interaction of increasing inflation with a non-neutral tax system that discriminates against corporate held assets. Within the context of a dynamic rational expectations two-sector (housing services and a corporate produced background good) model in which capital allocation responds to changes in the corporate tax rate, it is demonstrated that there is no reason to expect housing prices to rise with inflation-induced increases in taxes. I. Introduction The 1970s witnessed a striking change in the real prices of the two principal assets held in the U.S. economy. Between 1970 and 1980 the Standard and Poor's Stock Price index increased by 48 per cent; in the same period the homeownership portion of the consumer price index increased 144 per cent and the Bureau of Census Index of Homeownership Costs increased by 163 per cent. These dramatic price movements represent a striking change in the valuation of household portfolios in the space of a decade. A number of recent papers have explained the rise in the real price of housing (also of land and gold) as

Modeling the Cost of Homeownership

This article presents an investigation of the cost of homeownership by constructing a mathematical model with refinements and illustrates an important type of problem solving with calculators, which falls in line with recommendations found in An Agenda for Action (1980, 1, 4).

The Investment in Housing As a Forward Market Transaction: Implications for Tenure Choice and Portfolio Selection

A model of tenure choice is presented which treats the benefits and costs of homeownership from a theory of finance perspective. The incremental benefits from homeownership over renting housing services are from two sources: protection against rental price risk (a forward transaction in the housing market) and from a possible capital gain from the eventual sale of a house (substitutes for portfolio investment). The cost of these benefits is higher initial outlay on housing, which reduces the funds available for portfolio investments. The comparative statics of this model is presented. It is shown that rental risk and portfolio risk add to the value of homeownership. Since homeownership is a partial substitute for portfolio investment, it is shown that the lower the covariance between portfolio returns and future home prices the more valuable is homeownership. In the presence of differential borrowing opportunities it is shown that the leverage available to housing significantly increases the value of homeownership.

Estimation of Mortgage Defaults Using Disaggregate Loan History Data

This paper addresses, theoretically and empirically, the structure of influences affecting the default option in mortgage contracts. A formal theoretical model recognizes that a number of loan and non‐loan related effects beyond equity in the unit could influence the default decision. These include 1) payment levels relative to income, which could displace other investment opportunities or cause a need for borrowing or sale to meet mortgage obligations; 2) current and expected neighborhood and housing market conditions, in particular the expected relative rate of appreciation of the unit and the relative cost of homeownership; 3) economic conditions; 4) wealth; 5) borrower characteristics proxying for variability in income or “crisis” events; as well as 6) transactions costs incurred upon default. Estimates of the model making use of a micro‐level sample of individual loan histories over a twelve year period, supplemented by longitudinal census and economic information, find a number of these “other” effects important. Simulations find several of them to dominate the equity effect on default and to help explain why some households with zero or negative equity may not default, while others with positive equity may. The implications of these results for appropriate specification of the pricing model describing the default option and for appropriate underwriting of AMIs are noted.

Tax Subsidies to Owner-Occupied Housing: An Asset-Market Approach

Inflation reduces the effective cost of homeownership and raises the tax subsidy to owner occupation. This paper presents an asset-market model of the housing market and estimates how changes in the expected inflation rate affect the real price of houses and the equilibrium size of the housing capital stock. Simulation results suggest that the accelerating inflation of the 1970s, which substantially reduced homeowners' user costs, could have accounted for as much as a 30 percent increase in real house prices. Persistent high inflation rates could lead ultimately to a sizable increase in the stock of owner-occupied housing.

Is the Consumer Price Index a Fair Measure of Inflation?

The Consumer Price Index (CPI) is widely used to adjust wages and federal benefits as an offset to inflation, but the index contains substantial sources of bias as used for such purposes. For instance, these sources of bias, such as changes in the real cost of petroleum, the cost of environmental protection, and an inappropriate method for measuring homeownership costs, accounted for nearly half of the CPI increase in the year from November 1978 to November 1979. Because of the nature of the index, such biases will always be present, creating the risk that the CPI may be adding to the inflation that it is only supposed to measure. Therefore, a new index or indexes that are more appropriate for adjusting wages and benefits for inflation should be developed.