Hostname: page-component-586b7cd67f-gb8f7 Total loading time: 0 Render date: 2024-11-25T08:05:05.199Z Has data issue: false hasContentIssue false
  • English
  • Français

Alternative Mortgage Instruments, the Tilt Problem, and Consumer Welfare

Published online by Cambridge University Press:  06 April 2009

James Alm  and
James R. Follain Jr
Get access Rights & Permissions [Opens in a new window]

Extract

The Standard Fixed Payment Mortgage (SFPM) has been the dominant mortgage instrument in the United States for the last 50 years, and for much of this period it has performed well. However, during periods of high and volatile rates of inflation, the SFPM suffers from severe weaknesses. Foremost among these problems, from the standpoint of the borrower, is the tilt in the stream of real mortgage payments toward the initial years of the mortgage. For consumers unconstrained by capital market imperfections, this tilt is unimportant. However, a consumer is typically unable to borrow against expected higher future income, or against the nominal capital gains that accrue to the owner of a house over the life of the mortgage. In addition, common practices of mortgage lenders often limit mortgage payments to some fraction of income at the time of purchase. Together, these liquidity constraints create a mismatch between the time sequence of mortgage payments and income, a mismatch that reduces the number of borrowers who qualify for financing and that limits the value of the house purchased by those who do obtain financing.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 19 , Issue 1 , March 1984 , pp. 113 - 126
Copyright
Copyright © School of Business Administration, University of Washington 1984

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

[1]Aim, James, and Follain, James R. Jr, “Alternative Mortgage Instruments: Their Effects on Consumer Housing Choices in an Inflationary Environment.” Public Finance Quarterly, Vol. 10 (04 1982), pp. 134–157.Google Scholar
[2]Artie, Roland, and Varaiya, Pravin. “Life Cycle Consumption and Homeownership.” Journal of Economic Theory, Vol. 18 (06 1978), pp. 38–58.CrossRefGoogle Scholar
[3]Colton, Kent W.; Lessard, Donald R.; Modest, David M.; and Solomon, Arthur P.. “The National Borrower Study.” In Alternative Mortgage Instruments Research Study, Vol. 1. Washington, D.C.: Federal Home Loan Bank Board (1977).Google Scholar
[4]Dolde, Walter. “Capital Markets and the Short-Run Behavior of Life Cycle Savers.” Journal of Finance, Vol. 33 (05 1978), pp. 413–428.CrossRefGoogle Scholar
[5]Follain, James R. Jr, “Does Inflation Affect Real Behavior: The Case of Housing.” Southern Economic Journal, Vol. 48 (01 1982), pp. 570–582.CrossRefGoogle Scholar
[6]Follain, James R., and Struyk, Raymond. “Homeownership Effects of Alternative Mortgage Designs.” Journal of the American Real Estate and Urban Economics Association, Vol. 5 (Spring 1977), pp. 1–43.CrossRefGoogle Scholar
[7]Goodman, Allen C., and Kawai, Masahiro. “Permanent Income, Hedonic Prices, and Demand for Housing: New Evidence.” Journal of Urban Economics, Vol. 12 (09 1982), pp. 214–237.CrossRefGoogle Scholar
[8]Hendershott, Patric. “Real User Costs and the Demand for Single-Family Housing.” Brookings Papers on Economic Activity, No. 2 (1980), pp. 401–444.CrossRefGoogle Scholar
[9]Hendershott, Patric, and Villani, Kevin. Reform of the Housing Finance System. Washington, D.C.: American Enterprise Institute (1979).Google Scholar
[10]Just, Richard E.; Hueth, Darrell L.; and Schmitz, Andrew. Applied Welfare Economics and Public Policy. Englewood Cliffs, NJ: Prentice-Hall, Inc. (1982).Google Scholar
[11]Kearl, James R. “Inflation, Mortgages, and Housing.” Journal of Political Economy, Vol. 87, Part 1 (10 1979), pp. 1115–1138.CrossRefGoogle Scholar
[12]deLeeuw, Frank. “The Demand for Housing: A Review of Cross-Section Evidence.” Review of Economics and Statistics, Vol. 53 (02 1971), pp. 1–10.CrossRefGoogle Scholar
[13]Lessard, Donald R., and Modigliani, Franco. “Inflation and the Housing Market: Problems and Potential Solutions.” In New Mortgage Designs for Stable Housing in an Inflationary Environment. Boston, MA: Federal Reserve Bank of Boston (1975).Google Scholar
[14]Meeks, Carol B., and Bilderback, Rebecca. Alternative Mortgage Instruments: Consumer Bane or Boon. Ithaca, NY: Department of Consumer Economics and Housing, Cornell University (1978).Google Scholar
[15]Muth, Richard. “The Demand for Non-Farm Housing.” In The Demand for Durable Goods, Harberger, Arnold, ed. Chicago, IL: University of Chicago Press (1960).Google Scholar
[16]Pissarides, Christopher A. “Liquidity Considerations in the Theory of Consumption.” Quarterly Journal of Economics, Vol. 42 (05 1978), pp. 279–296.CrossRefGoogle Scholar
[17]Polinsky, A.M. “The Demand for Housing: A Study in Specification and Grouping.” Econometrica, Vol. 45 (03 1977), pp. 447–461.CrossRefGoogle Scholar
[18]Poole, William. “Housing Finance under Inflationary Housing Conditions.” In Ways to Moderate Fluctuations in Housing Construction. Washington, D.C: Board of Governors of the Federal Reserve System (1972).Google Scholar
[19]Ranney, Susan I. “The Future Price of Houses, Mortgage Market Conditions, and the Returns to Homeownership.” American Economic Review, Vol. 71 (06 1981), pp. 323–333.Google Scholar
[20]Rosen, Harvey S., and Rosen, Kenneth T.. “Federal Taxes and Homeownership: Evidence from Time Series.” Journal of Political Economy, Vol. 88 (02 1980), pp. 59–75.CrossRefGoogle Scholar
[21]Schwab, Robert M. “Expected Inflation and Housing: Cash Flow and Tax Considerations.” Southern Economic Journal, Vol. 49 (04 1983), pp. 1162–1168.CrossRefGoogle Scholar
[22]Schwab, Robert M. “Inflation Expectations and the Demand for Housing.” American Economic Review, Vol. 72 (03 1982), pp. 143–153.Google Scholar
[23]Smith, James D.; Wiest, Philip R.; and Field, Alfred E.. “Demographic Analysis of Potential Demand for Alternative Mortgage Instruments.” In Alternative Mortgage Instruments Research Study, Vol. 1. Washington, D.C.: Federal Home Loan Bank Board (1977).Google Scholar
[24]Tobin, James. “Wealth, Liquidity, and the Propensity to Consume.” In Human Behavior in Economic Affairs, Strumpel, B., Morgan, J., and Zahn, E., eds. New York: Elsevier (1972).Google Scholar
[25]Tobin, James, and Dolde, Walter. “Wealth, Liquidity, and Consumption.” In Consumer Spending and Monetary Policy. Boston, MA: Federal Reserve Bank of Boston (1971).Google Scholar
[26]Wheaton, William C. “Life-Cycle Theory, Inflation, and the Demand for Housing.” Unpublished manuscript (1982).Google Scholar
[27]Wiseman, Clark. “Windfalls and Consumption under a Borrowing Constraint.” Review of Economics and Statistics, Vol. 57 (05 1975), pp. 181–184.CrossRefGoogle Scholar