Macroeconomic Approach to Housing Issues

Florida State University, Tallahassee FL

Investigators

Abstract

With about 8 trillion dollars in mortgage debt, the housing market uses a sizeable fraction of the financial resources of the economy and dominates most financial portfolios. Recent housing price movements have impacted household portfolios thus generating important ramifications for the economy. The idea behind this grant is to take a new approach to study the role of housing in the economy so that we have a better understanding of the determinants of housing tenure and housing investment decisions, as well as the determinants of house price movements and their impact on financial markets. Increased understanding of these issues can result in improved design and implementation of public policies thereby giving this project a broader impact. The research requires the use of tools that allow for household heterogeneity. The discipline of this approach requires a model that allows individuals to adjust to events in a manner that is consistent with acting in their own self-interest. The model equilibrium generates important testable implications of our theories and allows welfare analysis to be conducted. The rising cost of housing has implications for entry into owner-occupied as well as rental housing. This means mortgage financing plays an important role for many households who want to enter the owner-occupied housing market. Households choose a mortgage contract from a menu of mortgage contracts. We plan to examine whether the various mortgage contracts allow housing goals to be achieved. An important question is whether the financial sector will provide products that allow first-time buyers to enter the housing market and stay in the housing market, avoiding foreclosure. A related issue is a careful analysis of mortgage refinancing. Our modeling approach will allow these issues to be examined and evaluated. The payoff should have implications for the design of public policy toward mortgage markets. Perhaps the most important questions involve recent house price movements. Much of our work thus attempts to understand price movements in the housing market. A better understanding of the supply side of housing, especially the construction of new housing, is a critical factor for understanding housing price movements. The richness of decisions incorporated into our model makes it a good laboratory for public-policy analysis. For instance, recent concern over housing affordability has lead to a number of policy suggestions. A voucher program has been suggested as a way to get lower income households into the housing market. Our approach allows us to examine the efficacy of various policies, including this one.