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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.

Suggested Citation

  • François Ortalo-Magné & Sven Rady, 2005. "Heterogeneity within Communities: A Stochastic Model with Tenure Choice," CESifo Working Paper Series 1465, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_1465
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    References listed on IDEAS

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    Cited by:

    1. Basant K. Kapur, 2016. "Another Look At Price Instability And Consumer Well-Being: Nondurable And Durable (Housing) Markets," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 61(02), pages 1-9, June.
    2. Pablo Casas-Arce & Albert Saiz, 2006. "Owning versus leasing: do courts matter?," Working Papers 06-21, Federal Reserve Bank of Philadelphia.
    3. Patrick Bayer & Robert McMillan & Alvin Murphy & Christopher Timmins, 2011. "A Dynamic Model of Demand for Houses and Neighborhoods," Working Papers 11-16, Duke University, Department of Economics.
    4. François Ortalo-Magné & Andrea Prat, 2005. "The Political Economy of Housing Supply," Levine's Bibliography 122247000000000954, UCLA Department of Economics.
    5. Martin Gonzalez-Eiras & Dirk Niepelt, 2004. "Sustaining Social Security," 2004 Meeting Papers 199, Society for Economic Dynamics.
    6. Joseph Gyourko & Christopher Mayer & Todd Sinai, 2013. "Superstar Cities," American Economic Journal: Economic Policy, American Economic Association, vol. 5(4), pages 167-199, November.
    7. 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.
    8. Charles Ka Yui Leung, 2015. "Availability, Affordability and Volatility: The Case of the Hong Kong Housing Market," International Real Estate Review, Asian Real Estate Society, vol. 18(3), pages 383-428.
    9. Markus Haavio & Heikki Kauppi, 2006. "House price fluctuations and residential sorting," 2006 Meeting Papers 774, Society for Economic Dynamics.
    10. Ko, Kate, 2009. "Home Prices and Urban Corridors," 50th Annual Transportation Research Forum, Portland, Oregon, March 16-18, 2009 207607, Transportation Research Forum.
    11. Patrick Bayer & Robert McMillan & Alvin Murphy & Christopher Timmins, 2016. "A Dynamic Model of Demand for Houses and Neighborhoods," Econometrica, Econometric Society, vol. 84, pages 893-942, May.
    12. Leung, Charles Ka Yui & Tang, Edward Chi Ho, 2014. "Availability, Affordability and Volatility: the case of Hong Kong Housing Market," MPRA Paper 58770, University Library of Munich, Germany.
    13. Haavio, Markus & Kauppi, Heikki, 2009. "House price fluctuations and residential sorting," Research Discussion Papers 14/2009, Bank of Finland.

    More about this item

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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