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Heterogeneity within Communities: A Stochastic Model with Tenure Choice

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  • François Ortalo-Magné
  • Sven Rady

Abstract

Standard explanations for the observed income heterogeneity within communities rely on differences of preferences across households and heterogeneity of the housing stock. We propose a dynamic stochastic model of location choice where households differ according to income only, and homes are identical within locations. Households choose whether to own or rent their home motivated by concerns over housing expenditure risk. The model highlights how differences in the timing of moves generate income heterogeneity across homeowners within neighborhoods, in particular in cities that experience strong positive demand shocks. US Census data provides evidence in favor of the income mixing mechanism we identify. In communities that have experienced strong price growth, the heterogeneity of homeowners’ incomes is positively correlated with the heterogeneity of the times since they bought their homes. Homeowners who moved in more recently earn higher incomes than homeowners who bought earlier, more so in cities with strong housing price growth. These relationships do not hold for renters.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1465.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1465

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Citations

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Cited by:
  1. Pablo Casas-Arce & Albert Saiz, 2006. "Owning versus leasing: do courts matter?," Working Papers 06-21, Federal Reserve Bank of Philadelphia.
  2. Gonzales-Eiras, Martín & Niepelt, Dirk, 2004. "Sustaining Social Security," Seminar Papers 731, Stockholm University, Institute for International Economic Studies.
  3. Hilber, Christian A.L. & Liu, Yingchun, 2008. "Explaining the black-white homeownership gap: The role of own wealth, parental externalities and locational preferences," Journal of Housing Economics, Elsevier, vol. 17(2), pages 152-174, June.
  4. Markus Haavio & Heikki Kauppi, 2006. "House price fluctuations and residential sorting," 2006 Meeting Papers 774, Society for Economic Dynamics.
  5. Joseph Gyourko & Christopher Mayer & Todd Sinai, 2006. "Superstar Cities," NBER Working Papers 12355, National Bureau of Economic Research, Inc.
  6. François Ortalo-Magné & Andrea Prat, 2005. "The Political Economy of Housing Supply," Levine's Bibliography 122247000000000954, UCLA Department of Economics.
  7. Patrick Bayer & Robert McMillan & Alvin Murphy & Christopher Timmins, 2011. "A Dynamic Model of Demand for Houses and Neighborhoods," NBER Working Papers 17250, National Bureau of Economic Research, Inc.

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