The Importance of Wealth and Income in the
Transition to Homeownership (December 2004, 23 p.)
Homeownership has received great support from policy makers
because of its perceived significant financial and social
benefits for both individuals and communities. Interested
researchers have generated a rich body of research on factors
that could help increase homeownership rates, especially among
low-income and minority households. Most studies have focused
on household income and wealth constraints, although recent
work has devoted more attention to household credit risk.
These studies have consistently found that downpayment constraints
restrict access to homeownership with greater frequency than
income. More recent studies employing credit measures have
also found that wealth and, to a lesser extent, credit constraints
are more important than income constraints in limiting access
to homeownership. Most of these studies employ a simulation
methodology. Surprisingly, none of the existing studies use
longitudinal data to observe how cohorts of households actually
transition from renting to owning over a long period of time,
how the probability of this transition relates to household
income and wealth, and how the relationship between income
and wealth and the transition to homeownership may change
over time for an individual household. As time passes, changes
in household circumstances, market conditions, or government
policies and lending practices could influence the role of
income and wealth in the probability of transitioning to homeownership.
Our study is the first to examine the probability of becoming
a homeowner during a period of 15 years. It uses survival
analysis to investigate how the influence of factors that
typically affect the transition to homeownership changes over
time. It therefore addresses a set of questions that have
not yet been addressed in the literature, including: has there
been any change in the importance of wealth and income on
transition to homeownership over time, and do income and wealth
have similar effects on whites and minorities over longer
periods? With regard to the first question, there is reason
to believe that income and wealth influences may have changed
since the 1980s as a result of broader changes in housing
and mortgage markets and government policies. With respect
to the second question, previous research on racial disparities
in homeownership suggests that income and wealth may be more
important factors in determining tenure choice for minorities.
The most important contribution of this paper to existing
literature is that it used longitudinal data and survival
analysis to examine changes over time in the relative importance
of income and wealth in predicting homeownership. The study
uses the Panel Survey of Income Dynamics (PSID) data to examine
the period between 1984 and 1999. As supplementary data on
household wealth were only collected in 1984, 1989, 1994,
and 1999 in a constant five year span, only those years could
be used to investigate the importance of both income and wealth
levels of households to their transition to homeownership.
The survival analysis follows all renters in the 1984 data
who remain as heads of a household in 1989, 1994, and 1999
to see whether and when they achieved the transition to homeownership
in each of the five-year periods since 1984.
The findings confirm that both household income and wealth
have significant importance to the transition to homeownership.
For minorities, wealth is a more important predictor of the
transition to homeownership, with significantly higher levels
of wealth needed to achieve the same probability of homeownership
as white households all else equal. Several explanations for
this finding are possible. Lenders may require higher downpayments
by minorities to mitigate other credit risks not captured
by these data. Another explanation might be that minority
borrowers may have greater aversion to debt and so voluntarily
choose larger downpayments. Finally, minorities may be disproportionately
concentrated in higher cost markets, which could not be controlled
for in the estimated model due to a lack of geographic identifiers
in the data.
Some evidence is found to suggest that the importance of
wealth in predicting homeownership has declined over time.
These results provide some support for the view that the proliferation
of mortgage products allowing for low downpayments in the
late 1990s may have contributed to a reduction in the importance
of wealth for achieving homeownership during the 1994 to 1999
period. But such changes are not significantly more evident
among minorities even though wealth was found to be more important
for minorities than for whites. These results, however, are
somewhat fragile, so further research is needed to support
this conclusion.
We also do not find any support for a reduction in the importance
of the income, despite the fact that mortgage product innovation
has increased the allowable ratios of debt-to-income. However,
most existing research has found that wealth constraints have
been more important in limiting homeownership than income
constraints. Thus, the results of this study may be taken
to mean that the relaxation of downpayment has been more important
in increasing homeownership opportunities than changes in
allowable debt ratios. However, it is possible that relaxed
debt-to-income ratios had less impact on the ability to purchase
a home and a greater impact on the value of the home purchasers
could afford – an impact that was not evaluated in this
study.
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