The effectiveness of homeownership in building household wealth
The recent economic and financial crisis and the current slow recovery highlight that homeownership plays a critical role in the U.S. economy. The estimated “equivalent rent” implicitly paid by homeowners accounts for more than 8 percent of gross domestic product. Investment in single-family housing also represents a significant share of GDP and is closely tied to the business cycle. During the past decade, such investment has ranged from as little as 1.3 percent of GDP during recessions to as much as 3.4 percent during expansions. The associated large fluctuations in demand for owner-occupied housing play an important role in driving the business cycle. In addition, demand for owner-occupied housing is especially sensitive to intermediate-term real interest rates and hence to inflation and monetary policy expectations. ; Homeownership also plays an important role in determining household saving, which has implications for national saving and investment. Some aspects of homeownership increase household and national saving. For example, renters intending to purchase a home have an incentive to save to make a down payment on their first home. In addition, new homeowners must promise to save far into the future by making monthly mortgage principal payments. On the other hand, homeownership typically requires large house-related payments and so can reduce household cash flows available to invest in financial assets such as stocks and bonds. ; For decades, conventional wisdom has viewed homeownership as an effective way to build household wealth. However, the recent fall in house prices has caused some observers to question this belief. Rappaport examines whether homeownership effectively builds household wealth. He develops an analytical framework to compare the wealth that homeowners have historically accumulated by building equity in their houses with the wealth they could have accumulated by renting an identical house and investing the resulting saved cash flow in stocks and bonds.
Volume (Year): (2010)
Issue (Month): Q IV ()
|Contact details of provider:|| Postal: |
Phone: (816) 881-2254
Web page: http://www.kansascityfed.org
More information through EDIRC
|Order Information:|| Email: |
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.:
- James Poterba & Todd Sinai, 2008. "Tax Expenditures for Owner-Occupied Housing: Deductions for Property Taxes and Mortgage Interest and the Exclusion of Imputed Rental Income," American Economic Review, American Economic Association, vol. 98(2), pages 84-89, May.
- Todd Sinai & Nicholas Souleles, 2013.
"Can Owning a Home Hedge the Risk of Moving?,"
American Economic Journal: Economic Policy,
American Economic Association, vol. 5(2), pages 282-312, May.
- Morris A. Davis & Francois Ortalo-Magne, 2011.
"Household Expenditures, Wages, Rents,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 14(2), pages 248-261, April.
- Morris Davis & Francois Ortalo-Magne, 2010. "Code files for "Household Expenditures, Wages, Rents"," Computer Codes 09-92, Review of Economic Dynamics.
- Morris A. Davis & François Ortalo-Magné, 2007. "Household Expenditures, Wages, Rents," CESifo Working Paper Series 2156, CESifo Group Munich.
- Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005.
"Assessing high house prices: bubbles, fundamentals, and misperceptions,"
218, Federal Reserve Bank of New York.
- Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing High House Prices: Bubbles, Fundamentals and Misperceptions," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 67-92, Fall.
- Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing High House Prices: Bubbles, Fundamentals, and Misperceptions," NBER Working Papers 11643, National Bureau of Economic Research, Inc.
- Randal Verbrugge, 2009.
"The Puzzling Divergence of Rents and User Costs, 1980-2004,"
422, U.S. Bureau of Labor Statistics.
- Randal Verbrugge, 2008. "The Puzzling Divergence Of Rents And User Costs, 1980-2004," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 54(4), pages 671-699, December.
- Ihlanfeldt, Keith R. & Martinez-Vazquez, Jorge, 1986. "Alternative value estimates of owner-occupied housing: Evidence on sample selection bias and systematic errors," Journal of Urban Economics, Elsevier, vol. 20(3), pages 356-369, November.
- 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.
When requesting a correction, please mention this item's handle: RePEc:fip:fedker:y:2010:i:qiv:p:35-65:n:v.95no.4. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (LDayrit)
If references are entirely missing, you can add them using this form.