Rushing into American Dream - House Prices, Homeownership, and Consumer Credit

December 14th, 2013
in econ_news

By Sumit Agarwal, Luojia Hu, and Xing Huang - Federal Reserve Bank of Chicago

Homeownership is the ultimate American dream. Homeownership has several advantages to the household, the society, and the government as a whole. Homeownership increases neighborhood social capital investment because homeowners face high real estate transaction costs (reducing mobility) and have a financial incentive to increase their property value (see also DiPasquale and Glaeser (1999)). Additionally, households derive investment utility from the home. The society benefits because homeownership reduces crime, increases social interactions in the community, and builds neighborhoods. The government benefits because homeowners pay taxes and consume at a higher level.

Follow up:

Modeling the demand for housing is complicated. Houses provide utility, serve as collateral for additional credit needs, and may bring investment benefits as well. This suggests that homeownership may vary over the lifecycle and over cohorts. Past literatures have focused on the impact of demographics (such as marriage), income and credit constraint. In this paper, we investigate the influence of house price growth on the life-cycle demand for homeownership. We focus on first-home purchases, because first-home purchases account for 40% of sales over the past 30 years and more than 50% in 2009, according to the National Association of Realtors. First-home purchase may also matter for the long-term dynamics of housing market, because first-home purchase affects the demand for trade-up homes in the future housing market (Ortalo-Magne and Rady (2006)).

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Rushing into American Dream

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