Housing choices and uncertainty: the impact of stochastic events

In our model a household recognizes that family size is stochastic when making its tenure and housing consumption decisions. It also recognizes that initial choices constrain later behavior because they affect the amount of savings. Simulations of the model show that housing consumption and the duration of stay in a residence are sensitive to whether the realization of the stochastic event is the expected value. Based on this observation, we suggest that empirical housing studies should include both the expected and realized values of stochastic explanatory variables. We find few behavioral responses to changes in the variance of an uncertain event even though increased uncertainty is passed through to after-tax income and the user cost of owning. A notable exception is that if a household knows that a change in an influential variable will occur, but it does not know the direction of change, it is more likely to rent initially. (C) 2002 Elsevier Science (USA). All rights reserved.