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Do Households Use Homeownership To Insure Themselves? Evidence Across U.S. Cities

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  • Jonathan Halket

    ()

  • Michael Amior

Abstract

Are households more likely to be homeowners when �housing risk� is higher? We show that homeownership rates and loan-to-value (LTV) ratios at the city level are strongly negatively correlated with local house price volatility. However, causal inference is confounded by house price levels, which are systematically correlated with housing risk in an intuitive way: in cities where the land value is larger relative to the local cost of structures, house prices are higher and more volatile. We disentangle the contributions of high price levels from high volatilities by building a life-cycle model of homeownership choices. The model is able to explain much of the cross-city dispersion in homeownership and LTV. We find that higher price levels explain the lower homeownership, while higher risk explains the lower LTV in high land value cities. The relationship between LTV and risk highlights the importance of including other means of incomplete insurance in models of homeownership. Finally, we use the model to show why regression-based inferences about the effect of risk on homeownership are biased.

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Paper provided by University of Essex, Department of Economics in its series Economics Discussion Papers with number 718.

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Date of creation: 28 Jul 2012
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Handle: RePEc:esx:essedp:718

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Cited by:
  1. Jonathan Halket & Santhanagopalan Vasudev, 2012. "Home Ownership, Savings, and Mobility Over The Life Cycle," Economics Discussion Papers 712, University of Essex, Department of Economics.
  2. Jonathan Halket & Santhanagopalan Vasudev, 2013. "Online Appendix to "Saving Up or Settling Down: Home Ownership over the Life Cycle," Technical Appendices 12-89, Review of Economic Dynamics.
  3. Jonathan Halket & Matteo Pignatti, 2012. "Housing tenure choices with private information," Economics Discussion Papers 717, University of Essex, Department of Economics.
  4. Mika Kortelainen & Tuukka Saarimaa, 2012. "Do homeowners benefit urban neighborhoods? Evidence from housing prices," Working Papers 36, Government Institute for Economic Research Finland (VATT).

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