Homeownership Decisions Research Articles

Borrowing Constraints and Housing Price Expectations in the Euro Area

This paper analyzes the importance of financial constraints on the home ownership decision of European households and their differential effect in periods of positive expectations of housing prices. We document that financial constraints are key drivers of the household home ownership decision being wealth constraints more relevant than income constraints. The wealth constraint is less binding under a scenario in which housing prices exhibit an upward trend.

Social Influence in the Housing Market

AbstractWe utilize the decennial U.S. Census to study social effects in housing consumption across 4 million households from 126 ethnic groups and 2,071 geographic locations in the United States. We find that the homeownership decisions within ethnic groups are locally correlated, after controlling for the homeownership rates within the group and the region. Social influence is stronger for younger, less educated, and lower-income individuals; immigrants; and Americans with ancestors from more unequal, uncertainty-avoiding, and collectivistic cultures. Our results suggest that both status and information considerations play an important role in the social comparison process in capital markets.

Home ownership decision in personal finance: some empirical evidence

Despite being one of the most important decisions a household has to make and extensively covered in personal finance textbooks, there is very little empirical guidance as to whether it pays to own a house. We examine this empirical question for households with different risk tolerance. By including home ownership into the general portfolio analysis of financial assets, we demonstrate clearly the interaction effect between financial assets and home ownership. We also offer a compre- hensive analysis of 20 regional housing markets to determine whether the economic case for home ownership varies across regions. For households that decide to rent instead of owning a house, this study offers evidence on the effectiveness of hedging housing consumption risk with investments in real estate investment trusts.

Determinants of the Homeownership Rate: An International Perspective

We present a comprehensive model of household tenure choice that guides our review of the literature on the impacts of tax and subsidy policies and focuses our critiques of various methodologies. We discuss the impacts on the likelihood of homeownership of house price capitalization and individuals' choices of household structure, loan-to-value ratio, and wealth accumulation. We argue that the best empirical studies use panel household-level data and a large set of measures of housing taxes and subsidies, macroeconomic variables, and household characteristics. We review three studies that illustrate the benefits and challenges of modeling the homeownership decision across countries.

The Mortgage Interest Deduction and its Impact on Homeownership Decisions

Abstract This paper examines the impact of the combined U.S. state and federal mortgage interest deduction (MID) on homeownership attainment, using data from 1984 to 2007 and exploiting variation in the subsidy arising from changes in the MID within and across states over time. We test whether capitalization of the MID into house prices offsets the positive effect on homeownership. We find that the MID boosts homeownership attainment only of higher-income households in less tightly regulated housing markets. In more restrictive places, an adverse effect exists. The MID is an ineffective policy to promote homeownership and improve social welfare.

Is Renting Better? A Review of the Home Ownership Decision amid Increasing Risk

There has always been an avid debate on the merits of owning versus renting a residence. There is a commonly accepted sentiment that owning a home is a wise investment. However, this sentiment is often unproven or supported with non-substantial evidence. The scholarly literature on the buy versus rent decision has conflicting results. Further, recent events in the US residential real estate market suggest increased asset riskiness which may have a dramatic effect on home ownership. Our research uses a capital budgeting model, similar to the lease versus buy analysis, with the output being the present value of buying instead of renting. The present value model includes the difference in cash flows between buying and renting for two standardized holding periods. A key contribution of the paper is a more accurate estimate of required return on equity, the discount rate in our present value model. As real estate values have recently demonstrated greater risk and the capital structure of homeowners may be highly leveraged, the cost of equity is higher than often suggested. The benchmark model uses point estimates for each variable with subsequent models including scenario analysis for key variables. The results suggest buying is better, in the benchmark model as well as scenarios allowing rents, home appreciation, mortgage rates and required return to vary. However, most scenarios show negative present values are possible, which contrasts the historic view that home ownership always has a positive return.

Condominium Townhouse Investment

AbstractThis accounting case involves the evaluation of various alternatives based on a real‐life personal property investment. The Condominium Townhouse Investment (CTI) case uses introductory management accounting concepts and analyses to introduce students to the case method of learning. The main concepts reinforced are relevant costs and revenues, including differentiating between opportunity and sunk costs. Students are not only asked to define and identify these items, but to consider choices centered on the decision alternatives in their role as accountants in public practice. This case is especially valuable because it offers students the chance to become engaged in an analysis and decision‐making situation that they can relate to both personally and professionally because, one day, they themselves are likely to become involved in a home ownership decision. The case focuses on real estate as a personal business investment, and requires both qualitative and quantitative analysis, with more emphasis on the qualitative aspect. In addition, the teaching notes include methods and strategies for students to use in an introductory managerial accounting class or level‐1 MBA class.

Parental wealth and resource transfers: How they matter in France for home ownership and living standards

The role played by parental wealth in facilitating the life chances and living standards of offspring is a topic of growing interest in stratification research. For working and middle class households much of their intervivos transfers to children is provided in the form of assistance with a home purchase. This paper examines the impact of parental wealth and transfers of wealth on several aspects of the homeownership decision – the timing of the purchase, the cost of the home, and the downpayment proportion, as well as living standards subsequent to the purchase. We utilize a unique data set from France which contains information on parental wealth and wealth transfers from both sets of parents of a couple. We correct for possible endogeneity of parental transfers and model the joint determination of the downpayment proportion and home value. The results make clear the complex pathways by which parental wealth influences the tenancy arrangements and living standards of offspring.

Ethnic Identity and Immigrant Homeownership

Immigrants are much less likely to own their homes than natives, even after controlling for a broad range of life-cycle and socioeconomic characteristics and housing market conditions. This paper extends the analysis of immigrant housing tenure choice by explicitly accounting for ethnic identity as a potential influence on the homeowner-ship decision, using a two-dimensional composite index of ethnic identity that incorporates attachments to both origin and host cultures. In the case of Germany, the evidence suggests that immigrants with a stronger commitment to the host country are more likely to achieve homeownership for a given set of socioeconomic and demographic characteristics, regardless of their level of attachment to their home country.

Condominium Townhouse Investment (CTI): A Case for Accounting Courses Where Cases are Not the Emphasis

This accounting case/instructional aid describes methods and strategies for students new to the case method and an actual case to work on. The objectives of this aid are: 1) to present a detailed approach that a student new to the case method can use for working on cases, independent of the need for instructor aid during class time; 2) to instill into the student that accounting is not always about arriving at a final number, but includes many interesting situations that require a variety of skills from an accountant; and 3) to provide a small real-life actual case for students to work on. The Condominium Townhouse Investment case (CTI) uses introductory management accounting concepts and analysis to introduce students to the case method of learning. The main concepts reinforced are relevant costs and benefits; and opportunity and sunk costs. The student is not only asked to identify these concepts, but to apply them in a decision on whether to rent out or sell a residential property. This decision is something students would be interested in and can relate to personally, because they themselves will eventually be involved in home ownership decisions. Nevertheless, the case focuses on real estate as an investment. The consequences of the alternative decisions are both monetary and qualitative, that require managerial and financial analysis to evaluate.

Regional and State Variation in Homeownership Rates; or If California's Home Prices Were as Low as Pennsylvania's Would its Ownership Rate be as High?

There are significant disparities in homeownership rates across the regions and states of the United States. The causes of these disparities are determined within a standard probit model of the individual homeownership decision where the micro-level observations are aggregated to the regional level. Factors which play a significant role at the individual level are evaluated for their ability to explain regional differentiation. The relative price of owning and renting plays a major role as do other market level determinants. Individual demographic characteristics are not as important with the exception of those related to the immigration and citizenship status of the household head.

Linking Consumer and Lender Perspectives in Home Buying: a Transaction Price Analysis

The linkage between consumer and lender perspectives in home buying is explored. The realized transaction price in the home buying exchange is used to conceptualize this association. A framework for modeling the home purchase decision from the perspective of both lenders and buyers is presented. Data from a sample of home buyers in the northeastern United States is used to test the models. Results indicate the lender and consumer models developed provide complementary insights into the market determination of homeownership. Findings highlight the emerging significance of psychological expectations and perceptions in the homeownership decision in addition to known income and demographic effects. Implications for public policy on housing are offered.

A Mathematical Model of the Housing Decisions of Elderly Homeowners

This article presents a mathematical model that attempts to capture the factors that are most important in determining an elderly homeowner's housing decision. The factors considered include the homeowner's home equity, financial assets, income, housing cost, and psychological attachment to the home. The findings indicate that the various factors may have quite different effects across the varied housing actions that the elderly may take. This suggests that any empirical analysis regarding the home ownership decisions of the elderly needs to distinguish among the different actions that the elderly can take.

The Impacts of Borrowing Constraints on Home-ownership in Australia

The analysis reported in this article incorporates direct measures of borrowing constraints into an otherwise standard model of the home-ownership decision in Australia. Borrowing constraints take into account mortgage underwriting criteria, household incomes and wealth, and the household's optimal level of consumption of housing services. Models containing borrowing constraint measures are estimated for households with heads ages 25-34, the age-group that is most likely to be moving into home-ownership. Consistent with previous findings in the US and Canada, borrowing constraints are significant determinants of the probability of ownership. Including borrowing constraints in the tenure-choice model results in a reduction in the independent impacts of household income and the relative costs of owning and renting, implying that in the standard model these variables are at least in part proxies for borrowing constraints. As wealth is the binding constraint for most constrained renters, the article concludes that government programmes to encourage first-time buyers should focus on reducing deposit requirements.

The Effect of the Probability of Marriage on Housing Demand for Single Women

This paper uses a simultaneous system of three equations to model housing choices for female-headed households (FHH). The system includes housing demand, the probability of owning, and the probability of marriage. Also, a wealth gap variable related to the downpayment constraint is measured and included in the tenure choice estimation. The probability of owning is lower for female householders anticipating marriage. The wealth gap significantly affects the home-ownership decision for all households, and wealth constrained FHHs are significantly more responsive to changes in the relative price of owning.

Living arrangements and homeownership decisions of American youth

Although tenure studies of aggregate data purport to explain ownership variation in response to social, economic, and demographic variables, these studies (Rosen and Rosen, 1980; Hendershott and Shilling, 1982) actually explain the ratio of two endogenous variables: the number of owners and total households. Analogously, microeconomic studies of households' tenure choice are subject to selection bias because they limit their analysis to individuals who have chosen to form a household (Rosen, 1979).1 Because similar types of variables (some unobserved) explain both choices, we suspect that bias resulting from sample selection could be substantial. In our approach, we model the choices of whether to live with a parent or not, and, having left the parental home, whether to live with a group or not. The results of these estimations are then used to correct for potential selectivity bias in our micro-based study of tenure choice. This correction is shown to be important in that one of the coefficients of the selection correction variables is statistically significant in the tenure-choice equation, and some coefficients in equations with and without the correction differ substantially. The jointness of the quantities of labor supply and housing demand is shown in

The homeownership decision of female-headed households

The homeownership rate of female heads of household is substantially lower than the rate for married women. A number of factors could account for this observation including differences in income and its sources, wealth, demographic characteristics, and the relative price of homeownership. We identify the impact of these factors and find income and the cost of owning relative to renting to be most important. Analysis of changes in female ownership rates over a 10-year period reveals the impact of the Equal Credit Opportunity Act which eased access to the mortgage market. We find evidence that ECOA raised the probability of homeownership for all women. However, much of the difference in ownership rates between married and unmarried women remains unexplained, especially for high income households.

RACIAL DIFFERENCES IN HOMEOWNERSHIP and HOUSING WEALTH, 1970-1986

RACIAL DIFFERENCES IN HOMEOWNERSHIP AND HOUSING WEALTH, 1970-1986 Black couples are found to own a disproportionately low share of aggregate housing wealth in the United States because they are less likely than whites to be homeowners and because black-owned houses have lower market values than white-owned houses. Probability of ownership and house value equations (corrected for selectivity bias) are estimated with national data for 1970, 1980, and 1986. Trends in racial differences in homeownership and house value are identified and reasons for their existence are investigated. I. INTRODUCTION The wage gap between blacks and whites has been the subject of many labor market studies during the last two decades. These studies spawned similar analyses of racial differences in other markets such as housing. Concern over the black-white differential in economic well-being continues today, with recent attention focusing on the wealth gap between blacks and whites. Andrew Brimmer [1988] points out that blacks owned only 3.0 percent of accumulated wealth in the United States in 1984, even though blacks received 7.6 percent of total money income that year and they comprised 11 percent of all households.(1) The equity accumulated in homes constituted the most important form of wealth held by blacks, but even so the black share of home equity was only 4.4 percent of the total. The value of black-owned housing will be disproportionately low if (a) blacks are not as likely as whites to own homes and (b) blacks' houses are relatively less valuable than whites' houses. In this paper we investigate both of these possibilities with national data on black and white households covering the period 1970-86.(2) Existing research has concentrated primarily on racial differences in the probability of homeownership, with an eye toward determining the extent of discrimination.(3) At least two prominent Congressmen (Joseph Kennedy of Massachusetts and Henry Gonzalez of Texas) have charged that government regulators routinely allow discrimination in home mortgage lending. Because most studies have relied on data from the 1960s and early 1970s, often covering only certain metropolitan areas, no reliable estimates of the national trend in black homeownership and housing market discrimination during more recent years exist. The question of how much housing blacks consume relative to whites, given the decision to own, has received only scant attention in the literature, yet both decisions influence wealth distribution. Our study compares the racial differentials in these two dimensions of the housing choice--ownership and value. A basic hypothesis of the paper is that house value differentials by race will be larger than homeownership differentials by race, since the factors that determine house prices are more numerous and probably more susceptible to discriminatory influence than the conditions that influence the decision to own rather than rent. II. A MODEL OF THE HOMEOWNERSHIP CHOICE This section describes a model of the homeownership decision that can be applied to available data. The model is similar to those of previous studies in that it relates the probability of owning a home to several explanatory variables reflecting economic, demographic, and locational characteristics of the household. It differs in an important respect, however, in that it is estimated on a sample that contains only husband-and-wife households.(4) Most earlier studies that have used samples drawn from the entire population have controlled for different household types (e.g., single, female-headed, widowed) by means of dummy variables. This procedure generally constrains the impact of race on the housing choice to be equal for all household types. In addition, McDonald [1974] has pointed out that the current values of variables such as income and labor market activity are more apt to misrepresent their permanent levels for single-person or female-headed households. …

An econometric model of the metropolitan housing market

This paper develops and estimates an econometric model of the metropolitan housing market. Emphasis is placed upon interrelationships that exist among sectors of these markets. Structural equations are posited to explain not only the supply of and demand for housing by both renters and owners, but also the homeownership rate for a metropolitan area and the vacancy rates for rental and owner-occupied housing. The model is estimated using aggregate data for 34 large metropolitan areas. Several specific questions are explored using the estimation results. First, why do housing prices vary among cities? Second, how elastic is the supply of housing? Third, what role do vacancies play in clearing the housing market, especially in rental housing markets? Fourth, how does housing demand interact with the homeownership decision? The overall picture of the metropolitan housing market that emerges shows supply to be quite elastic and housing prices largely determined by input prices. Demand is influenced by housing prices, especially in the rental sector. Housing prices also have a moderate effect on homeownership, but income and demographic variables are more important. Rental vacancies decline as rental price increases, which indicates that vacant units are a modest source of supply during periods of rising demand.

Effects of homeownership on household savings

Causal effects of homeownership decisions on the level and composition of household savings accumulation are estimated. Genuine positive impacts on both total and nonhousing savings as a function of house value chosen are found. The findings suggest, however, that the homeownership decision in conjunction with choice of an average owner-occupied house value does not substantially alter the total amount of accumulated household savings.