Download the ” Measuring Housing Affordability and Home Price Equilibrium” paper by Davidson and Levin. Discuss why the authors disagree with the NAR about the affordability of home ownership as of the article’s date.
The National Association of Realtors (NAR) argues that people live in a period of record high housing affordability; however, Davidson and Levin disagree with such a sentiment by considering the currently existing credit requirements and high down payment. For instance, they have demonstrated that a stricter demand for the latter is portrayed as a raised equity cost on the borrower’s balance sheet despite a constant loan rate. More so, even if the origination’s combined loan-to-value decreases during the period of falling interest rates, the drop in the annual fees could be more than offset by the increase in security deposit costs. Consequently, home ownership could become less affordable even in a falling interest-rate environment (Davidson and Levin 2).
Concerning the credit requirements, Davidson and Levin have demonstrated that consumers often opt for entering into a loan to raise the down payment. Still, they acquire it at a much higher rate. In this regard, the created loopholes and financial privileges for weak borrowers encourage them to obtain the finances; nonetheless, it inflates the demand for housing. Therefore, the proliferation of affordable lending programs, including high combined LTV loans, non-prime loans, and payment-reducing option ARM with underpriced risks, are considerable contributors to the housing boom and decline crisis (Davidson and Levin 13).
Davidson and Levin also disagree with the NAR because the latter has advocated for a standard measure in housing affordability that only considers loan payments. Unlike the typical one supported by the NAR, the authors instigate an affordability-linked HPI equilibrium, which is perceived to be a much better predictor of Housing affordability price index levels and trends. The one for the NAR is seen to be entirely predictive of the actual prices of houses, although other dynamics also have contributed to the HPI factors. The aspects therein are classified by Davidson and Levin as the HP12 model comprising systematic and non-systematic randomness; thus, unlike the one for NAR, the affordability index, in this regard, would understate the housing bubble in the country, in this case, the USA, and a state, such as California (Davidson and Levin 10).
Davidson, Andrew, and Alexander Levin. “Measuring Housing Affordability and Home Price Equilibrium: Revisiting the Housing Bubble & Bust and HPI Modeling.” AD&CO Quantitative Perspectives, 2012, pp. 1-13.
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Published On: 07-03-2018