Notes: These values were simulated intertemporally for a utility-maximizing household by James R. Alm and James R. Follain, Jr., "Alternative Mortgage Instruments, the Tilt Problem, and Consumer Welfare, Metropolitan Studies Program, Syracuse University, March, 1982. The study was funded jointly by the Comptroller of the Currency, the Department of Housing and Urban Development, and the Federal Home Loan Bank Board.

Another way to demonstrate the increased affordability of the PLAM relative to the SFPM is to estimate the number of households that are currently renting who could qualify for a specific house with a PLAM, but could not with an SFPM. The house price selected was $75,000. With a 10-percent down payment, this loan allows the purchase of the average house sold in January 1982, which was valued at $83,500. (Unfortunately, the PLAM does not help in terms of making the down

payment smaller.)

Figure 2 shows the percent of renters in 1980 that had income of at least the amounts stated on the horizontal scale. For example, 40 percent of all renting households had income greater than or equal to $15,000 per year. (Table 2 used a $15,000 income level instead of a $30,000 level because of this fact.)

the

Using this graph for interpolation, assuming a 30 percent required paymentto-income ratio (including just principal and interest), Table 4 shows initial monthly payments for various payment rates, for 20- and 30-year maturities. For example, at a payment rate of 10 percent and a maturity of 30 years, the initial monthly payment is $658. The minimum income to qualify for this package is $26,327. From Figure 2, about 13.3 percent of all renting households would qualify. The households projected to qualify are assumed to qualify on the basis of this lower interest rate upon which initial payments are based.

Table 5 compares, among others, this 13.3 percent of renters who qualify to the percentage of renting households qualifying at a 16-percent payment rate, as if they took an SFPM (and this is even below the current SFPM rate). The first

Percent

100

80

60

40

220

Figure 2. Percent of Renters Above Various Income Levels, (in 1980)

(From Census Current Population Report, P-60)

The percentage of

Notes: The minimum payment-to-income ratio was assumed to be 30 percent. renters qualifying was interpolated from Figure 1. The $75,000 mortgage amount was found by assuming 10 percent down on an $83,500 home, the average house value in January 1982, as tabulated from the mortgage interest rate survey of the Federal Home Loan Bank Board.

Notes:

The total number of renter-occupied households (excluding those who paid no cash rent) was 25,015,000 as of March 1981. The percentages were found from Table 3 by subtracting 2.9 percent, the percent that qualify for a 30-year, 16-percent mortgage, from the percentages qualifying with the specified interest rate and maturity.

row of Table 5 shows that 10.4 percent of renting households qualify for the house with a PLAM that has a 10-percent payment rate, who would not have qualified with a 16-percent mortgage. Since there were about 25 million households, as of March 1, 1981, who were paying (cash) rent, this translates into 2.6 million households whose homeownership dreams are made more realistic by

the PLAM.

Even if the PLAM with a 10-percent payment rate had a 20-year maturity and the SFPM at 16 percent had a 30-year maturity, 1.8 million households would qualify with the PLAM who would not have qualified with the SFPM.

With payment rates lower than 10 percent, the number of renting households who qualify gets even higher, in the 8 to 9 million range. Please recall that the PLAM does not help households accumulate a down payment. In fact, because of the extra risks previously discussed, the PLAM may require a higher down payment than an SFPM. These optimistic projections, then, should be tempered by this fact. However, the current high interest rates are usually perceived as a more critical factor for qualifying households than the down payment requirement.

Selecting an Index of Inflation

I wish to address the issue of the choice of the index for inflation, primarily because of what I perceive as pitfalls in making an inappropriate choice. I do not advocate government regulation over the choice of the index. Rather, the marketplace, it seems to me, is the best forum for making the choice. My remarks are thus aimed at second-guessing what indexes will eventually evolve in the marketplace.

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