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Housing Wealth and Mortgage Contracts

Author

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  • Joseph B. Nichols

    (Economics University of Maryland)

Abstract

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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    Cited by:

    1. Orazio Attanasio & Renata Bottazzi & Hamish Low & Lars Nesheim & Matthew Wakefield, 2012. "Modelling the Demand for Housing over the Lifecycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(1), pages 1-18, January.

    More about this item

    Keywords

    housing; mortgages; life-cycle model; parallel processing; portfolio allocation;
    All these keywords.

    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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