Macroeconomic Institutions and Policies (30K220B6)
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Samenvatting obligatory papers Macroeconomic Institutions and Policies
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Macroeconomic Institutions and Policies (30K220B6)
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Tilburg University (UVT)
Summary of the three compulsory papers of Module 2 Housing of the course Macroeconomic Institutions and Policies (EBE, year 2). The papers are:
Homeownership and the American Dream (1) , Is Housing Unaffordable? Why Isn't It More Affordable? (2) and The Baby Boom, The Baby Bust and The Housing Mar...
Macroeconomic Institutions and Policies (30K220B6)
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Paper Homeownership and the American Dream:
Bush framed homeownership as a way to reduce racial inequality and signed the American
Dream Downpayment Initiative to assist first-time homebuyers with obtaining a down
payment. The question was raised whether the American Dream should incorporate
homeownership. In this article we take a decent look at three different perspectives:
1. International perspective comparing US homeownership rates with those of other
nations
1. Data shows that the US homeownership rate is at the middle to lower end of
the range relative to other developed countries
2. Moreover, the US rate is about the same as it was in 1990, while
homeownership has increased substantially in other developed countries
2. Demographic perspective where we examine the correlation between changes in the
US homeownership rate between 1985 and 2015 and factors like
age/race/ethnicity/education/family status/income.
1. The homeownership rate increased more in 1995 and 2005 and fell more in
2015 than can be explained by demographics.
2. Part of the run-up in homeownership is probably due to relaxed credit
standards and new mortgage products that expanded the borrower base and
lowered default rates. Also, retirees whose homeownership rate was much
higher than the previous cohort of retirees.
3. In the aftermath of the Great Depression, homeownership fell with tight credit
conditions, problematic student loan debt, stagnant real incomes and perhaps
a subtle change in attitudes toward homeownership
4. Racial and ethnic disparities in home ownership remain pronounced.
Homeownership rates for black households have fallen every decade for the
last 30 years, both unconditionally and after controlling for income and
demographics. Even in 2015, black households with a college education are
less likely to own a house than white households who head not graduate from
high school
3. Financial benefits of homeownership
1. Internal rate of return (IRR) is quite favorable compared to other investments,
even during a period where home prices suffered the worst shock since the
Great Depression
2. Homeownership does not seem to impair mobility across metropolitan areas
during recessions
3. Homeownership appears to help borrowers accumulate housing and non-
housing wealth in various ways
4. The ability to build wealth through homeownership is dependent on holding
5. on to the home during downturns: lower-income and minority borrowers are
less likely to maintain homeownership through the cycle and thus benefit less
from homeownership
Overall conclusion: homeownership is a valuable institution. On average, it helps families to
build wealth and serves as a measure of financial security. It peaks in their 60s, suggesting
that owning a home helps reduce financial risk in retirement. Importantly, the mortgage
interest reduction is not the main source of these gains; even if it were removed,
homeowners would continue to benefit from a lack of taxation of imputed rent and capital
gains, which are tax benefits available in most countries around the world. There are
different homeownership experiences, depending on factors like purchase timing, holding
period and location. Policies might have put too much faith in the benefits of homeownership
during the 1990s and 2000s and now we may have too little faith in homeownership as part
of the American Dream.
, 1. International perspective comparing US homeownership rates with those of other nations
The age pattern of homeownership in the US is similar to that of other European countries.
In most countries, homeownership peaks around the retirement age.
Data shows that the US homeownership rate is at the middle to lower end of the
range relative to other developed countries
Moreover, the US rate is about the same as it was in 1990, while homeownership
has increased substantially in other developed countries
Reasons behind differences in homeownership across countries:
Culture, demographics, policies, housing finance systems and (in some cases) a past
history of political instability that favors homeownership
Germany vs UK: Germany allowed landlord to raise rents and provide protection for
renters, while the UK discouraged pirate rentals and German banks remained quite
conservative in mortgage lending
o German homeownership barely increased, while the UK rates increased a lot
Patterns in US homeownership rates
1985 1995 2005 2015
63.5% 65% 68.8% 62.7%
So, homeownership rates increased from 1985 to 1995 and peaked in 2005, and declined
after to 62.7% in 2015.
Cannot be explained by demographics alone (age/education)
The vast expansion in credit contributed to the rise in homeownership rate from 1985
to 2005. The effects of the Great Recession, in combination with student loan debt,
tight credit and subtle changes in attitudes towards homeownership contributed to
the fall in homeownership rates from 2005 to 2015.
Homeownership for blacks have declined relative to whites and Asians, which can
NOT be explained by income or demographics.
Table
Much of the increase in homeownership between 1985 and 2005 was driven by
retirees whose homeownership rate was much higher than the previous cohort of
retirees.
More education → more likely to be homeowners. Education has risen
Decline in homeownership for those with a high school education or less
Hispanics and non-whites have lower homeownership than white people
Married couples are more apt to be homeowners than either those living alone or
single households living with other relatives
⇒ goal of the analysis is NOT to determine causality but to summarize patterns that can be
compared to previous research and may be further explored in further analysis.
Analysis
Research does not yet fully explain why blacks have persistently lower
homeownership rates or why this gap has increased
o Discrimination could be a cause, but the resources policymakers have placed
into closing the gap in lending by race makes it unlikely that discrimination is
the only cause of this increased gap
Adding control variables does not eliminate the impact of education on
homeownership. Relative to those with a college education, households whose
heads have a lower educational level are less likely to be homeowners
Married households with children have the highest homeownership rate
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