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Housing Markets, Liquidity Constraints and Labor Mobility

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  • Markus Haavio and Heikki Kauppi

Abstract

Recent empirical studies have indicated that owner-occupation is inferior to private rental housing in enhancing efficient spatial matching of labor and jobs. While existing literature is lacking in sufficient explanations for these results, this paper attempts to fill a part of this gap. We develop an infinite horizon multi-region model, with stochastic regional business cycles and idiosyncratic shocks changing individual agents' match with the current job or technology. Under rental markets the opportunity cost for living in a booming region takes the form of a higher rent. Under owner-occupation, the opportunity cost consists of forgone interest revenues and stochastic capital losses, which materialize if the boom ends and housing prices fall. The paper shows that rental markets always result in the socially optimal outcome, with the most productive people living in the booming regions in every period. Also owner-occupation is efficient if the boom never shifts, or if changes in regional fortunes are very frequent and people can protect themselves against (small) capital losses through precautionary saving. Otherwise, however, the owner-occupied outcome is inefficient, as some agents are borrowing constrained, and cannot move to a booming region even when their current match is good. As a consequence housing prices are distorted, and also non-constrained workers typically follow non-optimal moving policies. In addition, option values affect the choice of location: high productivity agents with little wealth may fail to move to a booming region, if they fear that after a potential capital loss they are borrowing constrained and cannot live in a growth center in a later period when the match is even better. The main body of the paper uses numerical methods to study in more detail the circumstances where owner-occupation is inefficient. With different specifications of regional and idiosyncratic shocks, we solve equilibrium housing prices, interest rates and the invariant wealth distribution. We study the size of the borrowing constrained group, and examine labor mobility and welfare losses. We also analyze some policy issues, including property taxation and the impact of different borrowing limits.

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2001 with number 186.

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Date of creation: 01 Apr 2001
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Handle: RePEc:sce:scecf1:186

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Keywords: Labor mobility; Liquidity constraints; Owner-occupation; Rental housing;

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References

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  1. Lucas, Robert Jr. & Prescott, Edward C., 1974. "Equilibrium search and unemployment," Journal of Economic Theory, Elsevier, vol. 7(2), pages 188-209, February.
  2. Heikki Kauppi & Markus Haavio, 2003. "Housing Markets and Labor Mobility," Computing in Economics and Finance 2003 164, Society for Computational Economics.
  3. Jeremy C. Stein, 1993. "Prices and Trading Volume in the Housing Market: A Model with Downpayment Effects," NBER Working Papers 4373, National Bureau of Economic Research, Inc.
  4. Smith, Lawrence B & Rosen, Kenneth T & Fallis, George, 1988. "Recent Developments in Economic Models of Housing Markets," Journal of Economic Literature, American Economic Association, vol. 26(1), pages 29-64, March.
  5. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  6. Henley, Andrew, 1998. "Residential Mobility, Housing Equity and the Labour Market," Economic Journal, Royal Economic Society, vol. 108(447), pages 414-27, March.
  7. Weiss, Yoram, 1978. "Capital gains, discriminatory taxes, and the choice between renting and owning a house," Journal of Public Economics, Elsevier, vol. 10(1), pages 45-55, August.
  8. Williams, Joseph T, 1995. "Pricing Real Assets with Costly Search," Review of Financial Studies, Society for Financial Studies, vol. 8(1), pages 55-90.
  9. Hughes, Gordon & McCormick, Barry, 1985. "An Empirical Analysis of On-the-Job Search and Job Mobility," The Manchester School of Economic & Social Studies, University of Manchester, vol. 53(1), pages 76-95, March.
  10. Henderson, J Vernon & Ioannides, Yannis M, 1983. "A Model of Housing Tenure Choice," American Economic Review, American Economic Association, vol. 73(1), pages 98-113, March.
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Cited by:
  1. Rady, Sven & Ortalo-Magné, François, 2002. "Homeownership," Discussion Papers in Economics 28, University of Munich, Department of Economics.
  2. François Ortalo-Magné & Sven Rady, . "Homeownership: Volatile Housing Prices, Low Labor Mobility and High Income Dispersion," Wisconsin-Madison CULER working papers 02-04, University of Wisconsin Center for Urban Land Economic Research.
  3. Sven Rady, 2002. "Homeownership: Low household mobility, volatile housing prices, high income dispersion," FMG Discussion Papers dp432, Financial Markets Group.

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