NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Introducing Risky Housing and Endogenous Tenure Choice into Portfolio- Based General Equilibrium Models

Patric H. Hendershott, Yunhi Won

NBER Working Paper No. 3114 (Also Reprint No. r1755)*
Issued in October 1992
NBER Program(s):   PE

Portfolio-based general equilibrium models are useful for analyzing the

interaction between the structure of individual tax rates and the way

particular assets are taxed, for considering the role of differential tax rules

and risk in determining household pcrtfolio choices, and for addressing

distributional questions. Unfortunately, current versions of these models give

housing short shrift; owner housing is assumed to be riskless, rental housing

is not a separately identifiable asset, and tenure choice is of necessity

exogenously determined. This paper shows how these models can be extended to

incorporate a full housing subsector and uses an extended version of the

Galper-Lucke-Toder (GLT) model to analyze the impact of the 1986 Tax Act.

The interest rate impacts of the extended model are similar to those of

GLT: a sharp decline in the fully taxable rate (just over a percentage point),

a noticeable fall in the corporate equity rate (two-thirds of a point) and

increases in the returns on noncorporate equity and tax-exempt bonds. The

capital stock effects are different owing to endogenous tenure choice, the

riskiness of owner housing, and the smaller initial holdings of owner housing

by high income households. The owner housing stock increases by 3 percent, the

increase corning roughly 50/50 from rental housing and state and local capital.

The homeownership rate rises by one-half percentage pcint, virtually all of the

increase occurring for households with incomes under $30,000. The small

utility gains, $14 billion, are roughly comparable to those of the GLT model.

While most of the gains go to high income households, other households also

gain, unlike the results originally repcrted in GLT, which contained

computational errors.

*Published: Journal of Public Economics 48, pp. 293-316 (1992). August 1992

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