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Unformatted text preview: Mortgage Contracts and Housing Tenure Decisions ∗ Matthew S. Chambers Department of Economics Towson University Towson, Maryland 21252 Carlos Garriga Department of Economics Florida State University and CREB Tallahassee, Florida 32306 Don Schlagenhauf Department of Economics Florida State University Tallahassee, Florida 32306 June, 2005 Abstract In this paper, we analyze various mortgage contracts and their implications for housing tenure and investment decisions using a model with heterogeneous consumers and liquidity constraints. We f nd that di f erent types of mortgage contracts in F uence these decisions through three dimensions: the downpayment constraint, the payment schedule, and the amortization schedule. Contracts with lower downpayment require- ments allow younger and lower income households to enter the housing market earlier. Mortgage contracts with increasing payment schedules increase the participation of f rst-time buyers, but can generate lower homeownership later in the life cycle. We f nd that adjusting the amortization schedule of a contract can be important. Mortgage contracts which allow the quick accumulation of home equity increase homeownership across the entire life cycle. ∗ We acknowledge the useful comments from Michele Boldrin, Suparna Chakrahorty, Martin Gervais, Karsten Jeske, Monika Piazzesi, Martin Schneider, Eric Young, and participants at the Conference on Hous- ing, Mortgage Finance, and the Macroeconomy held at the Federal Reserve Bank of Atlanta. We are grateful to the f nancial support of Generalitat de Catalunya through grant SGR01-00029 and Ministerio de Cien- cia 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: 1 1 Introduction The home ownership rate, and the housing tenure decision have changed drastically in the United States. In the last century, the United States has gone from being a country of renters with a 44 percent homeownership rate to a country of homeowners with a homeownership rate of 68 percent. Over the same period, the size of the average home has also grown to almost 2,000 square feet. The expansion in homeownership and the growth in housing size during the postwar period is a result of the so-called "American Dream." A major factor, as documented in Chambers, Garriga, and Schlagenhauf (2005) is innovations in the home f nancing market. Speci f cally, mortgage contracts have evolved from being short duration with low loan-to-value ratios, to longer duration, with higher loan-to-value ratios. Increasing the homeownership rate continues to be a policy goal....
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- Spring '10
- Mortgage loan, Household income in the United States