House Price Variation and the Convenience Yield to Owning One’s Home

Abstract

Existing models of mortgage default cannot explain variation in mortgage performance across origination years because they do not account for the “convenience yield” households derive from owning, rather than renting, a home. The convenience yield is the flow of services from owning rather than renting an otherwise identical residence. This includes the ability to enter into a longer-term housing services contract, customize the residence, and pledge the house as collateral for external finance to increase current period non-housing consumption. We use house price and owner’s equivalent rent data to estimate the stochastic convenience yield of Gibson and Schwartz (1990) and Schwartz (1997) parameterized through the Kalman filter. We find that the national convenience yield is closely related to the rate of home equity withdrawal, while cross-sectional variation in the average convenience yield across metropolitan areas is explained by population churn rates. Both findings are consistent with the theory of an endogenous convenience yield to home ownership.