Mortgage Contracts and the Heterogeneity in the Total Return on Housing

Owner-occupied housing plays a central role in the portfolios of many households. Re-cent work has explored the connection between a household’s position in home equity and the demand for risky assets in the financial portfolio. Much of this work has ignored the vari-ability in the return on housing caused by the use of mortgage contracts in the purchase of owner-occupied homes. This paper develops an alternative measure of the return on housing that incorporates the consumption stream and the required mortgage payments associated with owner-occupied housing. This measure is then used to demonstrate how the total return on housing varies with anticipated holding length, terms of the mortgage contract, and borrower income level. Data from the American Housing Survey is then used to explore the empirical relationship between property, mortgage, and borrower characteristics and the total rate of re-turn on housing. Single-family homes, espcially those detached, provide significantly higher rates of return. Households that have low income, low education, or who are black have sig-nificantly lower total rates of return. The role of the mortgage contract seems to augment the effect of income, education, race and property type on the rate of return on housing. Comments are welcome at