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Housing Wealth and Mortgage Contracts

  • Joseph B. Nichols


    (Economics University of Maryland)

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    This paper develops a detailed partial equilibrium model of housing wealth's role over the life-cycle to explore (1) housing's dual role as a consumption and investment good; (2) the significance of the mortgage contract being in nominal and not real terms; and (3) the tax benefits associated with owner-occupied housing. The stochastic dynamic programming problem is solved using parallel processing. The baseline model is then compared with a set of alternate scenarios to explore these three key aspects of housing wealth. The results show that the ``over-investment'' in housing is not just a function of consumption demand but also can be driven by the benefits inherent in the mortgage contract. It also shows that the nominal mortgage contract results in the non-neutrality of perfectly expected inflation. Finally, the paper documents the effect of preferential tax treatment on housing demand

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    Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 75.

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    Date of creation: 11 Nov 2005
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    Handle: RePEc:sce:scecf5:75
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