ABSTRACT
The US financial system is currently undergoing revolutionary changes. Lines of demarcation between banks, thrifts, other financial intermediaries, and industry are rapidly eroding. In a tax-neutral world, the real value of capital should be unaffected by inflation, anticipated or unanticipated. The existing housing finance system differs in important respects from the hypothetical model. Equity shares in residential capital are scarce, mortgage instruments pay nominal returns; and housing finance intermediaries have undiversified portfolios. The most important consequences of the current tax law stem from the failure to tax imputed rent on owner-occupied housing and the preferential treatment of capital gains for homeowners. The ultimate constraint on arbitrage between owner-occupied housing and financial markets is the diminishing marginal utility of housing services. Inflation has been the most powerful economic force behind changes in the financial structure. Mortgage banking subsidiaries will be formed by commercial bank holding companies, savings and loan service corporations, and investment bankers.
