Discussion of
\Accounting for Changes in the Homeownership Rate"
by Chambers, Garriga and Schlagenhauf
Dirk Krueger
University of Pennsylvania, CEPR, and NBER
EFG Meetings in New York
February 8, 2007
Key Trends in the Housing Market 1994-2005
Home ownership rate has increased a lot.
Mortgage debt has increased a lot.
House prices have increased a lot.
Home Ownership Rate in the U.S.
70
69
Home Ownership Rate
68
67
66
65
64
63
62
61
60
1988
1990
1992
1994
1996
Year
1998
2000
2002
2004
Mortgage Debt and Home Ownership Rate in the U.S.
1
Home Ownership Rate
Mortgage Debt
65
60
1986
0.5
1988
1990
1992
1994
1996
Year
1998
2000
2002
2004
0
2006
Mortgage Debt
Home Ownership Rate
70
F E D E R A L R E S E R V E B A N K O F AT L A N TA
Figure 4
Consumption over the Life Cycle
Real house price index
200
Index (1975 = 100)
180
With GDP deflator
160
140
With PCE deflator
120
With CPI
100
80
1975
1980
1985
1990
1995
2000
2005
House price index growth rates
12
With PCE deflator
Percent (year-over-year)
10
8
6
With GDP deflator
4
2
0
–2
–4
With CPI
–6
–8
1975
1980
1985
1990
1995
2000
2005
Source: Office of Federal Housing Enterprise Oversight, Bureau of Labor Statistics, and Bureau of Economic Analysis
took a bite out of house prices, and even during the first four years of the recovery,
house prices stagnated.
After 1995, however, house prices staged an astonishing increase of almost 50 percent if deflated by CPI and 60 percent if adjusted by either of the deflators. Moreover,
no decline occurred in house prices around the 2001 recession, and no stagnation
occurred after the recession. On the contrary, as the second panel of Figure 4 shows,
year-over-year growth rates in real house prices even accelerated during and after the
recession to a record pace of 8 to 10 percent in 2004.
What is the effect of these house price fluctuations, especially the large run-up
in prices since the mid 1990s? In a model without heterogeneity, a life-cycle earnings
profile, and borrowing constraints, the effect on macroeconomic variables is exactly
zero in the following sense: Imagine an economy has only one representative con-
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ECONOMIC REVIEW
Fourth Quarter 2005
Objective of the Paper
Construct an OLG model with endogenous housing choice to answer:
Question 1: Can a calibrated version of the model account for observed
home ownership rates (by age) in 1994?
Question 2: Can changes in the age structure of the population and
nancial innovation in the mortgage market account for the increase
in homeownership rate between 1995 and 2005?
Outline of the Discussion
What drives tenure decisions over the life cycle?
How well does the model account for home ownership over the life
cycle?
Why do home ownership rates change along the transition from 1994
to 2005?
What may be missing?
Housing Choice over the Life Cycle
Frictionless benchmark model
max
T
X
fct;st;at+1 ;ht+1 g t=0
s.t.
ct + at+1 + ht+1 = yt + (1 + r)at + (1
t u( c ; s )
t t
)ht + R(ht+1
st )
Housing Choice over the Life Cycle
Households indi erent between owning and renting, portfolio choice
indeterminate
1
1+r =
1 R
u2 (ct ; s t )
r+
=
u1 (ct ; s t )
1+r
Introducing Trade-O s
Elements that favor renting/discourage owning:
{ Downpayment requirement: only mortgage contract is 30 year xed
with 20% down.
{ Housing is lumpy: ht+1 2 f0; h; : : : ; hg:
{ Transaction costs for buying.
{ Selling is risky (but not costly).
{ Fixed cost of becoming a landlord.
Introducing Trade-O s
Elements that favor owning:
{ Renting is more expensive: o < r
{ Tax system: mortgage interest payments tax-deductible, imputed
income from owner-occupied housing not taxed.
Home Ownership Rate by Age
100
Home Ownership Rate
90
1994 Data
1994 Model
80
70
60
50
40
30
20
30
40
50
60
Age Group
70
80
90
Accounting for the Change: Contenders
Changes in demographics
Financial innovation in the mortgage sector
{ Reduction in transaction costs
{ Relaxation in downpayment constraint
{ Introduction of combo loan
Home Ownership Rate by Age
100
Home Ownership Rate
90
1994 Data
2005 Data
80
70
60
50
40
30
20
30
40
50
60
Age Group
70
80
90
Accounting for the Change: Demographics
Changes in the population age structure:
Table I: Changes in Demographics
20-34 35-49 50-64 65-74
1994
32%
32%
19%
10%
2005
29%
31%
23%
9%
HOR 94
37%
65%
78%
80%
75-89
8%
8%
74%
Pure accounting generates an increase in the HOR of 1.5 percentage
points.
Home Ownership Rate by Age
Home Ownership Rate
100
1994 Data
2005 Data
90Model, 1994
Model, 2005 Demographics
80
70
60
50
40
30
20
30
40
50
60
Age Group
70
80
90
Home Ownership Rate by Age
Home Ownership Rate
100
1994 Data
2005 Data
Model, 1994
90
Model, No Transaction Costs
80
70
60
50
40
30
20
30
40
50
60
Age Group
70
80
90
Home Ownership Rate by Age
Home Ownership Rate
100
1994 Data
2005 Data
Model, 10% Downpayment
90
80
70
60
50
40
30
20
30
40
50
60
Age Group
70
80
90
Home Ownership Rate by Age
100
Home Ownership Rate
2005 Data
Model, 10% Downpayment
90 Model, 80−10 Combo
Model, 80−20−Combo
80
70
60
50
40
30
20
30
40
50
60
Age Group
70
80
90
What is Missing from the Paper
Transition analysis is remarkable. Document what comes out in much
greater detail (at expense of steady state analysis).
Show joint distribution of home ownership rate by age and income.
Document implications for mortgage debt.
Discuss the role of peculiar model elements (e.g. the house price shock
; the timing assumption st vs. ht+1).
What is Missing from the Model?
Allow for changes in p between 1994 and 2005 (and expectations of p
beyond 2005). Li and Yao (2007).
Optimal leverage and equilibrium default (Krueger and Jeske, 2005).
(Constrained-) Optimal mortgage design (Piskorski, 2007).
F E D E R A L R E S E R V E B A N K O F AT L A N TA
Figure 1
Homeownership Patterns by Age, Income, and Net Worth
Homeownership ratios by income quintile and age group
1.0
Quintile 1
Quintile 4
Quintile 2
Quintile 5
Quintile 3
.8
.6
.4
.2
0
0–29
30–39
40–49
50–59
60–69
70+
Age
Homeownership ratios by net worth quintile and age group
1.0
.8
.6
.4
.2
0
0–29
30–39
40–49
50–59
60–69
70+
Age
Source: Board of Governors of the Federal Reserve System, Survey of Consumer Finances 2001
In summary, households differ substantially, both between and within age groups,
in their net worth positions and asset allocations. As one would expect, when households are young and middle-aged they accumulate savings for retirement, and one
form of savings is real estate. Even within age groups, there is considerable heterogeneity of households. Incomes and especially net worth vary substantially across age
groups and between renters and homeowners. When trying to answer questions such
as “What is the effect of increasing house prices?” or “Should we subsidize mortgage
interest rates?” one should take into account that different households will be affected
very differently by changes in house prices or government policies. An increase in
house prices might be beneficial to existing homeowners, but renters may not be
affected at all or, even worse, might suffer if rental rates increase. Likewise, subsidizing mortgage interest—for example, through mortgage interest tax-deductibility or
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ECONOMIC REVIEW
Fourth Quarter 2005
To Conclude...
Very careful piece of quantitative work that addresses an important
and big stylized fact.
Passes the time series test for the U.S. For other countries, too?
Can you predict what tighter credit/falling prices will do to the home
ownership rate in the next few years?