Advanced Search
MyIDEAS: Login

The effectiveness of homeownership in building household wealth

Contents:

Author Info

  • Jordan Rappaport

Abstract

The recent economic and financial crisis and the current slow recovery highlight that homeownership plays a critical role in the U.S. economy. The estimated “equivalent rent” implicitly paid by homeowners accounts for more than 8 percent of gross domestic product. Investment in single-family housing also represents a significant share of GDP and is closely tied to the business cycle. During the past decade, such investment has ranged from as little as 1.3 percent of GDP during recessions to as much as 3.4 percent during expansions. The associated large fluctuations in demand for owner-occupied housing play an important role in driving the business cycle. In addition, demand for owner-occupied housing is especially sensitive to intermediate-term real interest rates and hence to inflation and monetary policy expectations. ; Homeownership also plays an important role in determining household saving, which has implications for national saving and investment. Some aspects of homeownership increase household and national saving. For example, renters intending to purchase a home have an incentive to save to make a down payment on their first home. In addition, new homeowners must promise to save far into the future by making monthly mortgage principal payments. On the other hand, homeownership typically requires large house-related payments and so can reduce household cash flows available to invest in financial assets such as stocks and bonds. ; For decades, conventional wisdom has viewed homeownership as an effective way to build household wealth. However, the recent fall in house prices has caused some observers to question this belief. Rappaport examines whether homeownership effectively builds household wealth. He develops an analytical framework to compare the wealth that homeowners have historically accumulated by building equity in their houses with the wealth they could have accumulated by renting an identical house and investing the resulting saved cash flow in stocks and bonds.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.kansascityfed.org/Publicat/EconRev/PDF/10q4Rappaport.pdf
Download Restriction: no

Bibliographic Info

Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.

Volume (Year): (2010)
Issue (Month): Q IV ()
Pages: 35-65

as in new window
Handle: RePEc:fip:fedker:y:2010:i:qiv:p:35-65:n:v.95no.4

Contact details of provider:
Postal: One Memorial Drive, Kansas City, MO 64198
Phone: (816) 881-2254
Web page: http://www.kansascityfed.org
More information through EDIRC

Order Information:
Email:

Related research

Keywords:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Thesia I. Garner & Randal Verbrugge, 2007. "Puzzling Divergence of U.S. Rents and User Costs, 1980-2004: Summary and Extensions," Working Papers 409, U.S. Bureau of Labor Statistics.
  2. Todd Sinai & Nicholas Souleles, 2013. "Can Owning a Home Hedge the Risk of Moving?," American Economic Journal: Economic Policy, American Economic Association, vol. 5(2), pages 282-312, May.
  3. James Poterba & Todd Sinai, 2008. "Tax Expenditures for Owner-Occupied Housing: Deductions for Property Taxes and Mortgage Interest and the Exclusion of Imputed Rental Income," American Economic Review, American Economic Association, vol. 98(2), pages 84-89, May.
  4. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing High House Prices: Bubbles, Fundamentals, and Misperceptions," NBER Working Papers 11643, National Bureau of Economic Research, Inc.
  5. Randal Verbrugge, 2009. "The Puzzling Divergence of Rents and User Costs, 1980-2004," Working Papers 422, U.S. Bureau of Labor Statistics.
  6. Ihlanfeldt, Keith R. & Martinez-Vazquez, Jorge, 1986. "Alternative value estimates of owner-occupied housing: Evidence on sample selection bias and systematic errors," Journal of Urban Economics, Elsevier, vol. 20(3), pages 356-369, November.
  7. Morris A. Davis & Francois Ortalo-Magne, 2011. "Household Expenditures, Wages, Rents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(2), pages 248-261, April.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Ira Gary Peppercorn & Claude Taffin, 2013. "Rental Housing : Lessons from International Experience and Policies for Emerging Markets," World Bank Publications, The World Bank, number 13117, October.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:fip:fedker:y:2010:i:qiv:p:35-65:n:v.95no.4. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (LDayrit).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.