Demand now depends on all of these factors i q h q d

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Demand now depends on all of these factors i ↑ → q ↓ h↑ → q↓ d↑ → q↓ g↑→ q↑ τ ↑→ q↑(more deductibles) V↑→ q↓ (more expensive, demand less) User-cost of housing per sq. ft for owner-occupier → [(I- τ ) Δi-Δg]v [(I- τ ) 0.01-0.01]v = -0.01 τ v<0 Usually inflation has a neutral effect, but bc of (1- τ ), U.S. tax code makes inflation a part of housing General inflation → user cost ↓ for owner-occupier, demand for owner-occupier ↑ Housing Bubble Expectation of capital gains rising(self-fulfilling prophecy) -User cost falls -value of house rises -b/t year 2000 and 2006, prices rose, growing unaffordability, collapse of capital gains expectations, severe drop in prices of houses and the end of the housing bubble -banks offering lower mortgage interest rates (i) → demand goes up, price goes up → makes situation worse -housing market crisis → bubble bursts → this kind of expectation cannot sustain anymore so the price crashes User-Cost of Rental Housing -Renters pay per sq. ft: P -Landlords: -buying at a unit price of V - λ: landlord’s income tax rate (100% mortgage full loans, no down payments)
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-landlord’s cost per sq. ft: (1 - λ)(i+h+d)V → after tax capital gains (1 - λ)p → after tax rent income -Landlord’s profits: (1 - λ)p-[(1 - λ)(i+h+d)v-(1 - λ)gv] =(1 - λ)[p-(i+h+d-g)v] Competition drives profit down to zero p=(i+h+d-g)V → user-cost of rental housing (p x q → the p is the cost for the landlord to rent to you) User-cost for owner [(1 - τ )(i+h)+d-g]V User-cost for renter (i+h+d-g)V 0< τ <1 → 0<1- τ <1 → costs more to rent (if comparing the two user-costs) (reality: ⅓ of US households are renters) Landlords are awarded depreciation deduction U.S. Tax code: d>=9.5 years d+e → rate of excess depreciation (1- λ)p-[(1-λ)(i+h+d-g)v-λev] Landlords get an add’l tax savings → λev (bc gov’t thinks their homes depreciate faster) User-cost of rental housing → (i+h+d-g)V-(λ/(1-λ))ev=p User-cost of owner-occupier → [(i- τ )(i+h)+d-g]v With the excess depreciation deduction, the user-cost of renters and owner-occupier changes. Sometimes one is higher and sometimes it’s lower
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(let τ =0, user-cost of owner lowers tax rates(lower incomes) → likely to be renters > for the renters so the line below user-cost for owners) Not about not being able to afford, not about affordability at all High income, τ high, enjoy the deductions to max, but lower income households not so much But landlords can pass on deduction benefits onto the renters, therefore they can take more advantage They can enjoy deductibles from excess depreciation from the landlords Economics emphasizes efficiency, not equality Comparative Stats: Increase in landlord’s tax rate ( λ) -λ increases -(1-λ) decreases (higher taxes in terms of rent but also deducting more so p actually decreases - λ/(1-λ) increases -p decreases
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(mobility can be taken into account) (tend to be renter when mobility is high) Downpayments Value -Downpayment → saving -Mortgage (patient people hold onto money and consume in the future) 𝛅 : discount faster Today:100 → a year from now: 𝛅
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