Inflation in the Housing Market : the Housing Affordability Experience of the 1970 ' S by Kermit

The sustained increase in house prices, mortgage interest rates, and other costs of owning a home during the 1970's put housing affordability into the forefront of public policy concerns. But while inflation was driving up homeownership costs, people's willingness to purchase bigger and better homes seemed stronger than ever. This dissertation is an indepth look at the housing cost issue over the 1970's: what it is, why it happened, who is most affected, and what can be done about it. Inflation changes the costs of owning a home in two distinct ways. By raising house prices, mortgage interest rates, and other costs of owning a home, it increases the cash costs of homeownership. At the same time, inflation increases the benefits of owning: rapid appreciation in home values increase the homeowner's equity, while greater interest and property tax payments, and favorable capital gain provisions produce increased tax savings. By computing homeownership costs for individual households and tracking them over time with the use of a panel data set, it was determined that the net effect of inflation in the housing market depends on the characteristics and situation of individual households. Upper-income households, who are in high tax brackets, had relatively lower homeownership costs than lower-income households. Long-term owners -who during the 1970's had older, lower-rate mortgages -still benefitted from rapidly appreciating house values, and therefore had comparatively lower housing costs than households who purchased late in the decade. These changes in homeownership costs were PAGE 3 reflected in their housing choices. Upper-income households increased their rate of ownership, and generally bought bigger and better homes over the decade. The homeownership rate for lower-income households decreased. Newly formed households increasingly chose to rent their first home, while longer-term owners could afford to buy more expensive homes. The role of federal housing policy in a period of high and uncertain inflation should be one of diminishing the detrimental effects of inflation. Since the housing cost concern of the 1970's was principally a financial phenomenon that had little to do with traditional housing supply or demand issues, policy actions should appropriately be aimed at the underlying financial causes. The characteristics of commonly used mortgage instruments, and the structure of homeownership tax policy are the two areas that merit the most attention. Thesis Supervisor: Dr. Bernard J. Frieden Professor of City Planning