MORTGAGE CONTRACTS AND THE DEFINITION OF AND DEMAND FOR HOUSING WEALTH

Owner-occupied housing plays a central role in the portfolios of many households. Recent work has explored the connection between a household’s position in home equity and the demand for risky assets in the £nancial portfolio. This dissertation examines the role of the mortgage contract on the de£nition of and demand for housing wealth. This £rst chapter 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 signi£cance of the mortgage contract being in nominal and not real terms; and (3) the tax bene£ts associated with owner-occupied housing. The household’s dynamic stochastic programming problem is solved using parallel processing. The results show that the “over-investment ” in housing is not just a function of consumption demand but also can be driven by the bene£ts inherent in the mortgage contract. It also shows that the nominal mortgage contract results in the non-neutrality of perfectly expected in¤ation. Finally, the paper documents the effect of preferential tax treatment on housing demand. This paper develops an alternative measure of the return on housing that incorporates the consump-tion 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 o