INFLATION, RISK, AND DISEQUILIBRIUM IN OWNER-OCCUPIED HOUSING: TWO ESSAYS IN APPLIED ECONOMETRICS

This dissertation is composed of two essays on owner-occupied housing. One essay examines the effects of general price inflation on relative housing price and the other analyzes the impact of non-price rationing of mortgage credit on housing investment.; There is a sharp dichotomy in the empirical literature on inflation and owner-occupied housing. While some studies focus on the impact of inflation expectations through the nominal mortgage rate, others focus on the impact of inflation through the tax treatment of owner-occupied housing. No study addresses the issue of inflation risk. Since these effects can be offsetting, only an approach which incorporates all of them jointly can produce evidence of the net impact of inflation on housing.; In the first essay, a model of stock demand for owner-occupied housing is formulated under inflation uncertainty. Speculative and hedging motives are identified, as well as mortgage instrument and tax effects. Under autoregressive expectations, those effects that are functions of expected inflation and those that are functions of realized inflation can be put on the same basis for comparison. The results indicate that while the dampening impact of the inflation premium in the nominal mortgage rate is significant, tax and portfolio effects dominate. The main conclusion is that general consumer price inflation was a major factor in the dramatic rise in relative house prices in the 1970's.; In the second essay, a simultaneous equation model of the housing investment and mortgage markets is formulated in which the usual assumption of market clearing is replaced by the condition that only the minimum of supply and demand is observed in each market. The phenomenon of mortgage credit rationing is specified as a disequilibrium spillover in the housing market. The possibility of disequilibrium in the housing market spilling over into the mortgage market is also examined.; Minimum distance estimates are calculated. The results indicate that the disequilibrium spillover from the mortgage to the housing market is quite strong, especially during several renowned "credit crunch" periods. Also, both supply and demand in the housing market are affected by the spillover. The evidence for a spillover from the housing to the mortgage market is much weaker.