A General Equilibrium Model of Housing, Taxes, and Portfolio Choice

50 Pages Posted: 28 Dec 2006 Last revised: 10 Aug 2010

See all articles by James A. Berkovec

James A. Berkovec

Federal Home Loan Mortgage Corporation (FHLMC)

Don Fullerton

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: November 1990

Abstract

We describe a model in which rental and owner housing are risky assets, tenure choice is endogenous, and each household is constrained to consume the same amount of owner housing as it has in its investment portfolio. At each iteration in the search for an equilibrium, we determine the new taxable income for each of 3,578 households (from the Survey of Consumer Finances), and we use statutory schedules to find the marginal rate and tax paid. Equilibrium net rates of return are major determinants of the amount of owner housing, but a logit model indicates that demographic factors are the main determinants of ownership rates. A simulation of taxes on owner housing raises welfare not only by re-allocating capital, but also because government takes part of the risk from individual properties and diversifies it away. Measures to disallow property tax or mortgage interest deductions do not help share this risk. Simulations of actual tax reform indicate a small shift from rental to owner housing, and welfare gains from re-allocating risk.

Suggested Citation

Berkovec, James A. and Fullerton, Don, A General Equilibrium Model of Housing, Taxes, and Portfolio Choice (November 1990). NBER Working Paper No. w3505. Available at SSRN: https://ssrn.com/abstract=471505

James A. Berkovec (Contact Author)

Federal Home Loan Mortgage Corporation (FHLMC) ( email )

8200 Jones Branch Drive
Mclean, VA 22102
United States
703-903-4356 (Phone)

Don Fullerton

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
(217) 244-3621 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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