econ 144b midterm study guide.pdf

# 100 0 1 high patient low impatient the value of

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100 0< 𝛅 <1 𝛅 : high → patient 𝛅 : low → impatient (the value of 𝛅 determines whether they are patient or not, and whether they will save up to become a homeowner in the future) (impatient people: consume “bread” + pay rent) Impatient: Co = income -rent C1 = income - rent Patient: Co = income - rent - downpayment C1 = income + downpayment 𝛅 (hat) 0<= 𝛅 (hat)<=1 ( 𝛅 is not a superfixed number)

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Downpayments and mortgage default Period 0---------------------------------------------- Period 1 -Buys house Vacate -V=D+M Pay M, sell house at V |||||| not pay M, mortgage default D= down payment, M = mortgage V*-M => “equity” in the house (how much they made by buying, living in, selling house) If V*- M>0, Pay M (no default) If V* - M< 0, if default then this person experiences C(default cost) If V* - M < -C (bc left hand side is already negative) V* → loss in equity C → default cost (V* - M is negative in this case) Then default: Equity = V* - M = V* - (V-D) =V* - V + D Again: If V* >= V > 0 pay If V* = V or V* < V → equity to default If V* - V + D < C, then default (If C is small, the loss doesn’t affect you that much → more default) For a given D, default is more likely if C is small For a given C, default is more likely if D is small (bc if you default, you lose all your downpayment)
Downpayment -barrier to homeowners (own if you save) -Downpayments discourage defaults Understanding housing bubble in the context of downpayments 1: severe decline in housing prices, V*-V becoming very negative 2: many home loan borrowers were paying almost zero down payment, D was low 3: banks loaned to borrowers with low credit ratings, C low Property Abuse and Tenure Choice Tenure : the conditions under which land/buildings are held or occupied Owner- occupies Period 1: buys a house at V during this stay O: Operating cost of house (utility/gas/trash) C: Cost of caring for the house -End of the period/time: sells -if care of house was maintained, sells at “V” -If no care taken, sells at V-D (reduced because of damages) Cost per 0-0: if care exercised:O+C → V+O+C-V = O+C If no care: O + D→ V+O-(V-D) = O + D Empirically , C<D Take care of house! => cost = O+C Consider renter: Landlord: buys house V, earns rent P, Rent = P incurs operating cost O, sells the Cost of care = C house at V-D Profit = -V+P-O+V-D Competition drives profit to O, =P-O-D P=O+D O+C → Own! O+D (C<D) incentive structure such that people rent from him and possibly take care of the house. (landlord assumes damage to house) Landlord: Cost w/care = O+C Cost w/o care = O+D If care is taken → P=O If care is NOT taken → P=O (but charge D; damage/security deposit

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-tenure choice can vary -damage premium: the larger the house, the more damage possible (costs too high to rent) Chapter 7 Housing Policies Housing Policies A. Rent control (price ceiling) 1. Under maintenance of property 2. Incentive to create new rental housing 3. Misallocation of households to dwellings Housing is a durable good; stock of housing much larger than “flow” of new construction Stock-Flow model of housing Variables (H, P, S, 𝚫 H, S 𝚫 H , D) Negative effects of rent control: 1. Inadequate maintenance: a consequence of lower spending by landlords a.
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