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The Policy Implications of Portfolio Choice in Underserved Mortgage Markets

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  • William Goetzmann
  • Matthew Spiegel

Abstract

Home ownership increases the incentive to maintain property and neighborhood, as well as decreasing the outflow of rents from low-income zones. However, these benefits are not costless to homeowners. With a mortgage comes the possibility of default, the financial demands of maintenance, a reduction in alternate investment opportunities, an increased exposure to fluctuations in local economic conditions, and a drastic reduction in the liquidity of personal wealth. Recently, policy makers have sought to increase mortgage lending in traditionally underserved markets. In this paper we consider the effects of this policy in light of the risk and return of housing and the current tax treatment of the home mortgage deduction. We find housing to be a relatively poor asset class in which to invest the bulk of family wealth. Trends in housing suggest that a large percentage of homeowners who bought and sold within a five year horizon in the United States over the last twenty years lost money on the investment. Lowering the equity required to purchase a home does little to alleviate the problem. We show that the current tax code - if anything - encourages renting over buying and gentrifica

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Bibliographic Info

Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm161.

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Date of creation: 01 Nov 2000
Date of revision: 01 Mar 2001
Handle: RePEc:ysm:somwrk:ysm161

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Web page: http://icf.som.yale.edu/
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References

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  1. Caplin, Andrew & Freeman, Charles & Tracy, Joseph, 1997. "Collateral Damage: Refinancing Constraints and Regional Recessions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 496-516, November.
  2. Goetzmann, W.N., 1990. "The Single Family Home In The Investment Portfolio," Papers fb-_90-15, Columbia - Graduate School of Business.
  3. Goetzmann, William N & Spiegel, Matthew, 1997. "A Spatial Model of Housing Returns and Neighborhood Substitutability," The Journal of Real Estate Finance and Economics, Springer, vol. 14(1-2), pages 11-31, Jan.-Marc.
  4. Ling, David C. & McGill, Gary A., 1998. "Evidence on the Demand for Mortgage Debt by Owner-Occupants," Journal of Urban Economics, Elsevier, vol. 44(3), pages 391-414, November.
  5. Robert J. Shiller & Allan N. Weiss, 2000. "Moral Hazard in Home Equity Conversion," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 28(1), pages 1-31.
  6. Spiegel, M. & Strange, W., 1989. "A Theory Of Predictable Excess Returns In Real Estate," Papers fb-_89-09, Columbia - Graduate School of Business.
  7. Poterba, James M, 1984. "Tax Subsidies to Owner-occupied Housing: An Asset-Market Approach," The Quarterly Journal of Economics, MIT Press, vol. 99(4), pages 729-52, November.
  8. Brueckner, Jan K, 1997. "Consumption and Investment Motives and the Portfolio Choices of Homeowners," The Journal of Real Estate Finance and Economics, Springer, vol. 15(2), pages 159-80, October.
  9. Owen Lamont & Jeremy C. Stein, 1999. "Leverage and House-Price Dynamics in U.S. Cities," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 498-514, Autumn.
  10. Fratantoni, Michael C., 1998. "Homeownership and Investment in Risky Assets," Journal of Urban Economics, Elsevier, vol. 44(1), pages 27-42, July.
  11. Goetzmann, William N & Spiegel, Matthew, 1995. "Non-temporal Components of Residential Real Estate Appreciation," The Review of Economics and Statistics, MIT Press, vol. 77(1), pages 199-206, February.
  12. Goetzmann, William Nelson, 1992. "The Accuracy of Real Estate Indices: Repeat Sale Estimators," The Journal of Real Estate Finance and Economics, Springer, vol. 5(1), pages 5-53, March.
  13. William N. Goetzmann & Brent W. Ambrose, 1996. "Risks and Incentives in Underserved Mortgage Markets," Yale School of Management Working Papers ysm62, Yale School of Management.
  14. Gyourko, Joseph & Linneman, Peter, 1996. "Analysis of the Changing Influences on Traditional Households' Ownership Patterns," Journal of Urban Economics, Elsevier, vol. 39(3), pages 318-341, May.
  15. Donald R. Haurin & Patric H. Hendershott & Susan M. Wachter, 1996. "Borrowing Constraints and the Tenure Choice of Young Households," NBER Working Papers 5630, National Bureau of Economic Research, Inc.
  16. Theodore M. Crone & Richard P. Voith, 1998. "Risk and return within the single-family housing market," Working Papers 98-4, Federal Reserve Bank of Philadelphia.
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Cited by:
  1. Sang-Wook Stanley Cho, 2007. "Accounting for Lifecycle Wealth Accumulation: The Role of Housing Institution," Discussion Papers 2007-27, School of Economics, The University of New South Wales.
  2. Claudio Campanale, 2007. "Increasing Returns to Savings and Wealth Inequality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(4), pages 646-675, October.
  3. Wenli Li & Rui Yao, 2005. "The life-cycle effects of house price changes," Working Papers 05-7, Federal Reserve Bank of Philadelphia.
  4. Antonia Diaz & Maria Jose Luengo Prado, 2008. "On the User Cost and Homeownership," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(3), pages 584-613, July.
  5. Yoshida, Jiro, 2007. "Technology Shocks and Asset Price Dynamics: The Role of Housing in General Equilibrium," MPRA Paper 6271, University Library of Munich, Germany.
  6. Wenli Li & Fang Yang, 2010. "American dream or American obsession? The economic benefits and costs of homeownership," Business Review, Federal Reserve Bank of Philadelphia, issue Q3, pages 20-30.
  7. Olivia S. Mitchell & John Piggott, 2004. "Unlocking Housing Equity in Japan," NBER Working Papers 10340, National Bureau of Economic Research, Inc.
  8. Sang-Wook Stanley Cho, 2007. "Household Wealth Accumulation and Portfolio Choices in Korea," Discussion Papers 2007-26, School of Economics, The University of New South Wales.

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