and Competition for useful comments and suggestions. Working papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views stated herein are those of the authors and are not necessarily those of the Federal Reserve Bank of Cleveland, the Board of Governors of the Federal Reserve System, or the Bank for International Settlements.

DESPITE THE PLETHORA of government programs and heated policy debates over the last several decades, little has been settled about the proper role for government in housing markets in general, and the mortgage market in particular. Government, it is argued, can play an important role in encouraging homeownership and eliminating discrimination in credit markets. Yet, hard evidence on the existence of discrimination is weak, as is the existing theoretical literature explaining discrimination in the credit market. Without an understanding of the magnitude and origin of discriminatory behavior in the marketplace, any policy response is merely a shot in the dark. Moreover, while being a minority is not synonymous with being poor, many programs designed to deal explicitly with poverty and its effect on housing market access are often shrouded with racial overtones in policy debates, further complicating discussion of their relative merits. This paper provides a survey and analysis of government interventions in the housing credit market. I We propose several possible goals behind government inter-The authors thank Roger Cannaday, Peter Colwell, William Gale, Joseph Haubrich, Charles Hill seminar participants at the Federal Reserve Bank of St. Louis, and the participants of the 1993 Conference on Federal Credit Allocation at the Federal Reserve Bank of Cleveland for helpful comments. 1. We limit the focus of our paper to the market for home mortgage loans. This, of course, ignores the dynamic interrelationships between the mortgage market and the housing market itself. Programs affecting housing opportunities for low-income and minority families will clearly have an impact on their experience in the mortgage market, and vice versa. For an overview of these interrelationships see Galster (l 992). Note that we are looking both at policies designed to reduce disparate racial outcomes in the home mortgage market and programs that are targeted more generally at the poor. This presents some difficulties since these distinct goals are often confused both in the literature and in policy circles. Neverthe-CHARLES W. CALOMIRIS is associate professor of finance at the University of Illinois at Urbana-Champaign and faculty research fellow at the National Bureau of Economic Research. CHARLES M. KAHN is professor of economics at the University of Illinois at Urbana-Champaign. STANLEY D. LONGHOFER is research economist at the Federal Reserve Bank of Cleveland.

This article demonstrates the importance of separating the bundled good of housing into land and improvements, arguing that changes in a property's overall value will depend critically on how much of its total value is contained in the land, a proportion we call land leverage. The importance of this deconstruction is demonstrated by highlighting how land leverage helps to explain variation in house price appreciation in Wichita, Kansas. Noting that land leverage should be relevant for many real estate issues and policies, we highlight four specific areas where consideration of land leverage could significantly improve our understanding of real estate markets.Land is the only thing in the world that amounts to anything . . . for 'tis the only thing in this world that lasts, and don't you be forgetting it! 'Tis the only thing worth working for, worth fighting for-worth dying for.Gerald O'Hara in Gone with the Wind 1

Models used to guide policy, as well as some empirical studies, suggest that the effect of housing wealth on consumption is large and greater than the wealth effect on consumption from stock holdings. Recent theoretical work, in contrast, argues that changes in housing wealth are offset by changes in housing consumption, meaning that unexpected shocks in housing wealth should have little effect on non-housing consumption. We reexamine the impact of housing wealth on non-housing consumption, employing the Case-Quigley-Shiller data on U.S. housing wealth that have been used in prior studies to estimate a large housing wealth effect. Existing empirical work fails to control for the fact that changes in housing wealth may be correlated with changes in expected permanent income, biasing the resulting estimates. Once we control for the endogeneity bias resulting from the correlation between housing wealth and permanent income, we find that housing wealth has a small and insignificant effect on consumption. Additional analysis of time-series results provides further support for that view.

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