A New Look at the Home Ownership Decision

  • August 22, 1998
  • • Written by: John R. Knight Cynthia Firey Eakin

Summer 1998, Vol 23, No 2

Abstract: The 1997 Taxpayer Relief Act, together with demographic, economic, and societal changes, fundamentally alters the tenure choice decision of prospective home buyers and generally favors the decision to rent rather than buy. This manuscript discusses the factors that influence the decision, analyzes the impact of changes in those factors, and illustrates the effects using national and regional house price and rent indexes. The authors apply a discounted cash flow model that incorporates recent tax changes to evaluate the financial wisdom of a buy decision under a variety of holding period assumptions. The notion that home ownership is becoming less attractive is supported by the data. The implied trend away from housing investment has important implications, not only for the prospective home buyer, but also for the real estate industry and government policymakers.