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Paper eres2001_250:
Optimal Tenure Decision: Discrete Binary Choice Approach

id eres2001_250
authors Önder, Zeynep; Süheyla Özy_ld_r_m
year 2001
title Optimal Tenure Decision: Discrete Binary Choice Approach
source 8th European Real Estate Society Conference (26-29 June 2001) Alicante, Spain
summary Tenure choice has been one of the most studied concepts in the housing literature (for example, Rosen, 1979; King, 1980; Fallis, 1983; Henderson and Ioannides, 1983; Fu, 1991). In the econometric studies, tenure choice and mobility decisions are considered to be related (for example, Boehm, 1981; Ioannides, 1987; Rosenthal, 1988; Ioannides and Kan, 1996; Kan, 2000). In the theoretical tenure choice models, households are assumed to maximize their expected utility subject to their budget constraints. These models try to solve household's tenure choice problem by using dynamic programming and solving with backward induction (for example, Artle and Varaiya, 1978). When individuals are faced with these types of problems in real life, it is found that they solve these problems by looking forward instead of backward induction (for example, Camerer, et al. 1993). The aim of this paper is to model and solve households' tenure choice problem by forward looking using genetic algorithm. The model replicates an individual's tenure and mobility decisions over life time period. The objective of the individual is to maximize the expected discounted value of his rewards by the optimal sequence of discrete housing tenure choices. In the initial stage, a representative household head at an age of 25 is taken and his tenure and mobility decisions are examined until the age of 75 over 5- or 10-year intervals. The decision points are considered at the ages of 25, 30, 35, 45, 55 and 65. At each decision point, there is a probability that he might move. If he moves, he has to make a tenure choice, own or rent a home. If he does not move, he stays in his current residence. It is assumed that individual will liquidate his house and move to a nursing home or die at the age of 75. Each individual is assumed to have certain initial endowment. In the initial period, if they decide to own a house, they will use this endowment as downpayment and get a mortgage for the remaining value of the house. The reward of the home owner is after tax household income after mortgage payments and property taxes. If individual wants to be a renter in the initial period, he will invest his initial endowment to get a market rate of return. His reward is after tax income he gets after paying rent. If individual moves, he has to pay transaction cost which is assumed to be higher for owners than renters (DiPasquale and Wheaton, 1996). At each decision point, the probability to move changes depending on the characteristics of the individual. In determining these probabilities, the model by Boehm, Herzog and Schlottmann (1991) is estimated using a sample of recent movers from 1990-1993 Panel Study of Income Dynamics data. In the logit estimation, the variables include income, size of family, marital status, change in marital status, race, gender, age, occupation, change of jobs, change in size of family, employment status. Hence, individual's moving probability changes over its life time. Several experiments are made using this model regarding to changes in property tax rates, changes in income tax rates, market interest rates and house price appreciation rates. The initial analyses suggest that when tenure choice problem is solved by forward looking rather than backward induction, different results are obtained regarding to the impact of these changes on household's tenure choice decisions. Moreover, the increase in property taxes is found to be reducing total welfare of the society.
series ERES:conference
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ratings
session Tenure Choice and policy II
last changed 2009/07/10 18:07
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