UNCERTAINTY, LIQUIDITY, AND HOUSING CHOICES

This paper analyzes the housing choices of illiquid households facing uncertain future housing prices. It shows that illiquidity in the hous ing consumption-investment model of Henderson and Ioannides (The Ameri can Economic Review, 1983, 73, no. 1, 98-113) causes a conflict betwee n the housing consumption and investment motives. Consequently, (1) a higher permanent income may not make housing investment and home ownin g more attractive, (2) the income path affects housing choices, and (3 ) greater expected housing price appreciation, or lesser uncertainty a s to the future price of housing, does not necessarily encourage housi ng investment. These results indicate the importance of controlling fo r household liquidity in empirical housing studies.