IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Housing Markets, Liquidity Constraints and Labor Mobility

  • Markus Haavio and Heikki Kauppi

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.

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" 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.

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

as
in new window

Length:
Date of creation: 01 Apr 2001
Date of revision:
Handle: RePEc:sce:scecf1:186
Contact details of provider: Web page: http://www.econometricsociety.org/conference/SCE2001/SCE2001.html
Email:


More information through EDIRC

References listed on IDEAS
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.:

as in new window
  1. Williams, Joseph T, 1995. "Pricing Real Assets with Costly Search," Review of Financial Studies, Society for Financial Studies, vol. 8(1), pages 55-90.
  2. 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.
  3. Henley, Andrew, 1998. "Residential Mobility, Housing Equity and the Labour Market," Economic Journal, Royal Economic Society, vol. 108(447), pages 414-27, March.
  4. Stein, Jeremy C, 1995. "Prices and Trading Volume in the Housing Market: A Model with Down-Payment Effects," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 379-406, May.
  5. Heikki Kauppi & Markus Haavio, 2003. "Housing Markets and Labor Mobility," Computing in Economics and Finance 2003 164, Society for Computational Economics.
  6. 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.
  7. Lucas, Robert Jr. & Prescott, Edward C., 1974. "Equilibrium search and unemployment," Journal of Economic Theory, Elsevier, vol. 7(2), pages 188-209, February.
  8. 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.
  9. 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.
  10. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:sce:scecf1:186. 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: (Christopher F. Baum)

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.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with 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 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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.