Homeownership

We develop a dynamic stochastic equilibrium model of two locations
within a city where heterogeneous households make joint location
and tenure mode decisions. To investigate the effect of
homeownership on equilibrium prices and allocations, we compare the
response of this model economy to a labor shock with that of a
rental-only version. This comparison yields three results. First,
homeownership enables more households to remain in the more
desirable location at the expense of newcomers. Second,
homeownership adds to the volatility of the housing market. Third,
homeownership may amplify the dispersion of household income within
a location. Homeownership raises distributional issues. The
households who consume the most housing gain the most from the
ability to own their home. Newcomers to the city are the main
losers.