HOR - Accounting for Changes in the Homeownership Rate...

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Accounting for Changes in the Homeownership Rate Matthew Chambers Department of Economics Towson University Towson, Maryland 21252 Carlos Garriga Department of Economics Florida State University Tallahassee, Florida 32306 Don E. Schlagenhauf Department of Economics Florida State University Tallahassee, Florida 32306 January 2005 (First version: June 2004) Abstract After 40 years of being relatively constant, the homeownership rate- a target for housing policy- has steadily increased since 1995. This paper attempts to understand why the homeownership rate has been increasing by constructing a quantitative model and then using this model to evaluate explanations that have been o f ered to account for this increase. We f nd that the increase in the homeownership can be explained by innovations in the mortgage market that allows households to take a positive housing investment position with a much smaller downpayment. We acknowledge the useful comments from David Marshall, Ed Prescott, and Eric Young. and seminar participants at Iowa State University, SUNY at Stony Brook, Uni- versity of Virginia, and the University of Tokyo. A version of this paper was presented at the 2004 Annual Meetings of the Society for Economic Dynamics. We are grateful to the f nancial support of Generalitat de Catalunya through grant SGR01-00029 and Ministe- rio de Ciencia y Tecnología through grant SEC2003-06080. Corresponding author: Don Schlagenhauf, Department of Economics, Florida State University, 246 Bellamy Building, Tallahassee, FL 32306-2180. E-mail: dschlage@mailer.fsu.edu. Tel.: 850-644-3817. Fax: 850-644-4535. 1
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1I n t r o d u c t i o n The purchase of a house is the largest single consumer transaction for most households. This should not be a surprising fact given that housing policy in the United States has been directed toward enhancing homeownership. Mortgage interest payments and property taxes are deductible for individu- als who itemize their personal income taxes. In addition, service f ows from owner occupied housing are not taxed. The government plays an active role in the mortgage market through Government Sponsored Agencies such as Fannie Mae and Freddie Mac as well as various programs that subsidize the entry costs for individuals who want to buy a house for the F rst time. 1 Given the focus of policy on the homeownership rate, we present the time series of this rate since 1965 in Figure 1. Figure 1: The Evolution of the Homeownership Rate 1965 1970 1975 1980 1985 1990 1995 2000 45 50 55 60 65 70 75 80 85 Time H o m e w n r s h i p R a t 1995 Average Period = 64.5 Two important facts seem apparent in this Figure. Until 1995, the home- ownership rate seems to be stationary around 64 percent. After 1995, the 1 For example, the Bush Administration sponsored the American Dream Downpayment Act which provides downpayment assistance, and has proposed a Zero-Downpayment Initiative for Federal Housing Administration (FHA) insured single-family mortgages for F rst time buyers.
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HOR - Accounting for Changes in the Homeownership Rate...

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