IDEAS home Printed from https://ideas.repec.org/p/red/sed004/357.html
   My bibliography  Save this paper

A Model of Life-Cycle Housing Choices with Uninsurable Labor Income and House Price Risks

Author

Listed:
  • Rui Yao
  • Wenli Li

Abstract

In this paper, we study a household’s optimal life-cycle housing choices by calibrating a model with uninsurable labor income and house price risks. In our setup, the household not only decides between renting and owning a house, but also chooses the size of its house. Borrowing is allowed but only through a fixed-rate mortgage. Adjusting the size of the existing house or mortgage incurs transaction costs. Our policy functions suggest that the household purchases a house when its wealth on hand is high relative to its permanent labor income. A homeowner who experiences a negative labor income shock may choose to convert illiquid home equity to liquid asset to finance non-housing consumption in the absence of lower borrowing rates. In keeping with stylized empirical facts, in our simulation homeownership rates and house values exhibit hump-shaped life-cycle patterns, while the holding of illiquid home equity exhibits a U-shape over a household’s age. Mortgage refinancing activities demonstrate a bi-modal pattern ― young homeowners refinance to ease liquidity concerns, while old homeowners refinance to defer house selling expenses and avoid higher renting costs. Comparative static analysis further reveals the importance of labor income and house price risks in housing decisions. In comparison to the benchmark case, a higher transitory income risk delays households’ home purchases, and leads to frequent refinancing activities among young, liquidity-constrained homeowners. By contrast, a higher permanent income risk induces households to save more. Although more of the savings are in liquid form, households also purchase their houses earlier, a result of households’ portfolio decision. Similar to the temporary labor income risk, a higher house price risk delays homeownership and increases the frequency of costly mortgage refinancing by young households who try gain access to illiquid home equity.

Suggested Citation

  • Rui Yao & Wenli Li, 2004. "A Model of Life-Cycle Housing Choices with Uninsurable Labor Income and House Price Risks," 2004 Meeting Papers 357, Society for Economic Dynamics.
  • Handle: RePEc:red:sed004:357
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Leung, Charles, 2004. "Macroeconomics and housing: a review of the literature," Journal of Housing Economics, Elsevier, vol. 13(4), pages 249-267, December.

    More about this item

    Keywords

    housing; mortgage refinance; life cycle;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed004:357. 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: (Christian Zimmermann). General contact details of provider: http://edirc.repec.org/data/sedddea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.