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Housing Markets, Liquidity Constraints and Labor Mobility

Markus Haavio and Heikki Kauppi
Authors registered in the RePEc Author Service: Markus Haavio and Heikki Kauppi

No 186, Computing in Economics and Finance 2001 from Society for Computational Economics

Abstract: Recent empirical studies have indicated that owner-occupation is inferior to private rental housing in enhancing efficient spatial matching of labor and jobs. While existing literature is lacking in sufficient explanations for these results, this paper attempts to fill a part of this gap. We develop an infinite horizon multi-region model, with stochastic regional business cycles and idiosyncratic shocks changing individual agents' match with the current job or technology. Under rental markets the opportunity cost for living in a booming region takes the form of a higher rent. Under owner-occupation, the opportunity cost consists of forgone interest revenues and stochastic capital losses, which materialize if the boom ends and housing prices fall. The paper shows that rental markets always result in the socially optimal outcome, with the most productive people living in the booming regions in every period. Also owner-occupation is efficient if the boom never shifts, or if changes in regional fortunes are very frequent and people can protect themselves against (small) capital losses through precautionary saving. Otherwise, however, the owner-occupied outcome is inefficient, as some agents are borrowing constrained, and cannot move to a booming region even when their current match is good. As a consequence housing prices are distorted, and also non-constrained workers typically follow non-optimal moving policies. In addition, option values affect the choice of location: high productivity agents with little wealth may fail to move to a booming region, if they fear that after a potential capital loss they are borrowing constrained and cannot live in a growth center in a later period when the match is even better. The main body of the paper uses numerical methods to study in more detail the circumstances where owner-occupation is inefficient. With different specifications of regional and idiosyncratic shocks, we solve equilibrium housing prices, interest rates and the invariant wealth distribution. We study the size of the borrowing constrained group, and examine labor mobility and welfare losses. We also analyze some policy issues, including property taxation and the impact of different borrowing limits.

Keywords: Labor mobility; Liquidity constraints; Owner-occupation; Rental housing (search for similar items in EconPapers)
JEL-codes: J6 (search for similar items in EconPapers)
Date: 2001-04-01
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