Download this Paper Open PDF in Browser

House Price Variation and the Convenience Yield to Owning One’s Home

36 Pages Posted: 17 Jan 2012 Last revised: 20 Mar 2013

Jason Thomas

George Washington University - Department of Finance; The Carlyle Group, L.P.

Robert Savickas

George Washington University - School of Business - Department of Finance

Date Written: February 2013

Abstract

Existing models of mortgage default cannot explain variation in mortgage performance across origination years because they do not account for the “convenience yield” households derive from owning, rather than renting, a home. The convenience yield is the flow of services from owning rather than renting an otherwise identical residence. This includes the ability to enter into a longer-term housing services contract, customize the residence, and pledge the house as collateral for external finance to increase current period non-housing consumption. We use house price and owner’s equivalent rent data to estimate the stochastic convenience yield of Gibson and Schwartz (1990) and Schwartz (1997) parameterized through the Kalman filter. We find that the national convenience yield is closely related to the rate of home equity withdrawal, while cross-sectional variation in the average convenience yield across metropolitan areas is explained by population churn rates. Both findings are consistent with the theory of an endogenous convenience yield to home ownership.

Keywords: House prices, convenience yield, residential mortgage default

JEL Classification: R21, R31, R38

Suggested Citation

Thomas, Jason and Savickas, Robert, House Price Variation and the Convenience Yield to Owning One’s Home (February 2013). Available at SSRN: https://ssrn.com/abstract=1986464 or http://dx.doi.org/10.2139/ssrn.1986464

Jason Thomas (Contact Author)

George Washington University - Department of Finance ( email )

2023 G Street
Washington, DC 20052
United States

The Carlyle Group, L.P. ( email )

1001 Pennsylvania Ave NW
Suite 220 South
Washington, DC 20003
United States

Robert Savickas

George Washington University - School of Business - Department of Finance ( email )

Funger Hall, Suite 501R
2201 G Street, N.W.
Washington, DC 20052
United States
202-994-8936 (Phone)
202-994-5014 (Fax)

HOME PAGE: http://savickas.net/

Paper statistics

Downloads
75
Rank
269,263
Abstract Views
625