Yet Another View on Why a Home Is One's Castle
Fuad Hasanov & Douglas Dacy, Real Estate Economics, Spring 2009, Pages 23-41
Abstract: We compute equity-based real after-tax rates of return for homeowners and landlords in the United States for 1952-2005. The study confirms that a combined aggregate for residential housing provides a high average net return and low volatility, has low correlation with financial assets and can provide a hedge against inflation. The efficient frontier analysis shows that the optimal portfolio for a household with a coefficient of relative risk aversion of four to five is one which contains a bit larger amount of housing than stocks, close to what one observes in the real world.
The Impact Of Deregulation And Financial Innovation On Consumers: The Case Of The Mortgage Market
Kristopher Gerardi, Harvey Rosen & Paul Willen Journal of Finance, forthcoming
Abstract: We develop a technique for assessing the impact of changes in the mortgage market on households. We start with an implication of the permanent income hypothesis: that the higher a household's expected future income, the more it desires to consume, ceteris paribus. If perfect credit markets exist, desired consumption matches actual consumption and current spending forecasts future income. Since credit market imperfections mute this effect, the strength of the relationship between house spending and future income measures the "imperfectness" of mortgage markets. Using micro-data, we find that over the past several decades, housing markets have become less imperfect in this sense. Mortgage securitization has played an important role in explaining this phenomenon.
The Housing Crisis and Bankruptcy Reform: The Prepackaged Chapter 13 Approach
Eric Posner & Luigi Zingales, University of Chicago Working Paper, March 2009
Abstract: The housing crisis threatens to destroy hundreds of billions of dollars of value by causing homeowners with negative equity to walk away from their houses. A house in foreclosure is worth 30 to 50 percent less than a house that a homeowner either retains or sells on the market, and a foreclosed house damages neighboring property values as well. We advocate a reform of Chapter 13 that would allow homeowners to strip down the value of their mortgages in a prepackaged bankruptcy. Such a plan would give homeowners an incentive to keep or resell their homes, thus reducing the market value loss of homes while protecting the effective value of creditors' interests. Two further key elements of the plan are that it uses prices based on the average house price in a particular ZIP code, which reduces moral hazard; and it is automated, requiring only a rubber stamp by a bankruptcy judge or other official, thus preserving judicial resources. Other plans, including that of the Obama administration, are compared.
(Nod to Kevin L, who phones home)