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On the User Cost and Homeownership

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Author Info
Antonia Diaz (Universidad Carlos III)
Maria Jose Luengo Prado (Northeastern University)

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Abstract

This paper studies the differences in the cost of housing services for renters and homeowners and calculates the bias that results when we value owner-occupied housing services using a rental equivalence approach. Our framework is a life-cycle model with endogenous tenure choice with households facing idiosyncratic uninsurable earnings risk and housing price risk. We model houses as illiquid assets that provide collateral for loans. To analyze the impact of preferential housing taxation on the tenure choice and the bias, we consider a tax system that mimics that of the U.S. economy. Namely, owner-occupied housing services are not taxed and mortgage interest payments are deductible. Through simulations, we show that a rental equivalence approach (relative to a user cost approach) overestimates the cost of housing services. The magnitude of the bias is very sensitive to both the income tax rate and the size of adjustment costs in the housing market. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2007.12.002
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Publisher Info
Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 11 (2008)
Issue (Month): 3 (July)
Pages: 584-613
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Handle: RePEc:red:issued:06-99

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Related research
Keywords: Consumption; Durables; Down payments; Housing; User cost;

Other versions of this item:

Find related papers by JEL classification:
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
C80 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - General
E39 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Other

References listed on IDEAS
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Full references

Cited by:
(explanations, 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.)

  1. Randal Verbrugge & Thesia I. Garner, 2009. "Reconciling User Costs and Rental Equivalence: Evidence from the U.S. Consumer Expenditure Survey," Working Papers 427, U.S. Bureau of Labor Statistics. [Downloadable!]
  2. Robert J. Gordon & Todd vanGoethem, 2005. "A Century of Housing Shelter Prices: Is There a Downward Bias in the CPI?," NBER Working Papers 11776, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Jonas D. M. Fisher & Martin Gervais, 2009. "Why has home ownership fallen among the young?," Working Paper Series WP-09-01, Federal Reserve Bank of Chicago. [Downloadable!]
    Other versions:
  4. Khalid Sekkat & Ariane Szafarz, 2009. "Valuing Homeownership," Working Papers CEB 09-006.RS, Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB). [Downloadable!]
    Other versions:
  5. 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. [Downloadable!]
  6. repec:bep:mactop:v:7:y:2007:i:1:p:1486-1486 is not listed on IDEAS
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