| Sumario: | In a recent comment published in the journal "Review of Economics and Statistics," economist Richard F. Muth argues that since the price of mortgage money defined in the author's original paper implies a negative effect of contract maturity on housing demand, the credit term variable in author's flow demand regression is inappropriate and, therefore, that the permanent income elasticity derived from this relationship is biased. Muth also argues that the author's estimated income elasticity of about 0.809 is not conformable to the alternative estimate derived from his rental-value equation. Further experiments with the data, however, show the results that are consistent with the author's original estimate, thus rejecting Muth's criticism. The actual mortgage interest cost to a borrower on a straight-term mortgage loan is the difference between the discounting of his future interest payments and the present value of a gain or a loss associated with his repayment of the loan at the end of contract maturity. Since housing expenditures are undertaken by household or family units rather than by individual consumers, the unit of analysis in the housing demand analysis should be a household decision-making unit rather than an individual unit. Using per-family figures, the author recomputed the regression of Muth's rental-value equation in which the rental value of housing was expressed as a function of housing stock and permanent income.
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