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Housing Wealth and Mortgage Contracts


  • Joseph B. Nichols

    () (Economics University of Maryland)


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

Suggested Citation

  • Joseph B. Nichols, 2005. "Housing Wealth and Mortgage Contracts," Computing in Economics and Finance 2005 75, Society for Computational Economics.
  • Handle: RePEc:sce:scecf5:75

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    References listed on IDEAS

    1. Roberts, Kevin & Weitzman, Martin L, 1981. "Funding Criteria for Research, Development, and Exploration Projects," Econometrica, Econometric Society, vol. 49(5), pages 1261-1288, September.
    2. Gene M. Grossman & Carl Shapiro, 1986. "Optimal Dynamic R&D Programs," RAND Journal of Economics, The RAND Corporation, vol. 17(4), pages 581-593, Winter.
    3. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters,in: Theory Of Valuation, chapter 8, pages 229-288 World Scientific Publishing Co. Pte. Ltd..
    4. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 707-727.
    5. Margrabe, William, 1978. "The Value of an Option to Exchange One Asset for Another," Journal of Finance, American Finance Association, vol. 33(1), pages 177-186, March.
    6. Eduardo S. Schwartz & Carlos Zozaya-Gorostiza, 2003. "Investment Under Uncertainty in Information Technology: Acquisition and Development Projects," Management Science, INFORMS, vol. 49(1), pages 57-70, January.
    7. Robert E. Lucas, Jr., 1971. "Optimal Management of a Research and Development Project," Management Science, INFORMS, vol. 17(11), pages 679-697, July.
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    More about this item


    housing; mortgages; life-cycle model; parallel processing; portfolio allocation;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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