Borrowing Constraints

Credit Impairment and Housing Tenure Status
(with Paul Calem and Simon Firestone)   Abstract  
Journal of Housing Economics, Vol. 19, No.3, September 2010, p. 219-232

We analyze the relationship between underwriting standards and low-income homeownership rates using the 1979 National Longitudinal Survey of Youth. The survey respondents are a nationally representative sample of Americans mostly 40-48 years of age as of the most recent wave of the survey in 2004. Past research has identified credit impairment, wealth constraints, and income constraints as finance-related barriers to homeownership. Using a model of tenure choice, we find that absent all three constraints, the homeownership rate of low-income households in our sample would increase from 52.5 to 59.3 percent. Approximately half of this differential is attributable to households with impaired credit and those with ‘thin-file status,’ the lack of a substantial credit history.

Does Credit Quality Matter for Homeownership? (with Irina Barakova, Raphael Bostic, and Paul Calem)   Abstract  
Journal of Housing Economics, Vol.12, Issue 4, December 2003, 273-356

In this study, we test for the role of credit quality as a factor in limiting access to homeownership. While micro-level household data on wealth and income are available for assessing income- and wealth-based constraints to homeownership, lack of data on household credit ratings has precluded evaluation of credit quality as a potential barrier to homeownership. The study, for the first time, measures the relative importance of credit-, income-, and wealth-based constraints and estimates how the effects of these constraints have evolved over the past decade. The results show that financing constraints continue to have an important impact on potential homebuyers. The wealth constraint has the largest impact, although its importance declined substantially during the 1990s. Credit quality based constraints have become more important barriers to homeownership during the 1990s, mostly reflecting an increase in the number of households with impaired credit quality. Thus, both wealth and credit constraints persist as barriers to the attainment of homeownership.

Racial Differences in Homeownership: The Effect of Residential Location (with Yongheng Deng and Stephen L. Ross)   Abstract  
Regional Science and Urban Economics, Vol. 33, Issue 5, September 2003, 517-556

The rate of homeownership among African-American households is considerably lower than white households in American urban areas. This paper examines whether racial differences in residential location outcomes are among the factors that contribute to the large racial differences in homeownership rates in major US metropolitan areas. Based on the 1985 metropolitan sample of the American Housing Survey for Philadelphia, the paper does not find any evidence that existing racial differences in residential location in Philadelphia decrease the homeownership rate among African Americans. Rather, the empirical evidence suggests that African-American residential location outcomes are associated with lower than expected racial differences in homeownership. Therefore, after controlling for neighborhood, racial differences in homeownership are larger than originally believed, and the ability of racial differences in endowments to explain homeownership differences is more limited.

Analyzing the Relationship among Race, Wealth and Home Ownership in America (with Joseph Gyourko and Peter Linneman)   Abstract  
Journal of Housing Economics, Vol 8, No. 2, 1999, 63-89

This paper presents new evidence on the determinants of the large disparities in home ownership by race in the U.S. Consistent with results first reported by P. Linneman and S. M. Wachter (1989,AREOFA J.7, No. 4, 389–402), we find noceteris paribusracial differences in ownership rates among white and minority households who possess sufficient wealth to meet down payment and closing cost requirements associated with standard mortgage underwriting criteria. However, substantial racial differences among wealth-constrained households exist, with constrained whites owning at higher rates than observationally equivalent minority households. Because minorities are disproportionately constrained by wealth-related underwriting standards, these differentials apply to roughly one-third of the white households in our samples and well over one-half of the minority sample. A multinomial model that treats central city versus suburban location as a choice variable in addition to tenure status is also estimated. The results show that even among households unconstrained by wealth-related underwriting considerations, minorities are much more likely than whites to own in central city locations. Thus, while controlling for wealth constraint status does eliminate tenure choice differences among the unconstrained, location differences remain for this group. They also are present among constrained households. Given the disparate fortunes of central city and suburban land markets in many metropolitan areas, this racial location pattern of ownership may have important long-run impacts on wealth distribution by race

Information Externalities and Home Mortgage Underwriting (with David C. Ling)
Journal of Urban Economics, Vol 44. 1998
Do Borrowing Constraints Change U.S Homeownership Rates? (with Man. Cho, Peter Linneman, Isaac F. Megbolugbe)   Abstract  
Journal of Housing Economics, Vol 6.4, 1997

This study has two main objectives. First, we estimate various alternative specifications of the tenure choice model with borrowing constraint variables, originally put forth by Linneman and Wachter, using a more recent sample of the Survey of Consumer Finance. Second, we simulate effects of policy changes governing constraints and changes in mortgage interest rates, both on households’ owning decisions and on the aggregate homeownership rate. While the impact of constraints has been demonstrated in previous studies, our research provides the first microsimulation estimates of the impact for aggregate homeownership rates for the entire U.S. population.

Borrowing Constraints and the Tenure Choice of Young Households (with Donald R. Haurin, Patric H. Hendershott)   Abstract  
Journal of Housing Research, Vol 8.2, 1997

In this paper we analyze the factors that affect the tenure choice of young adults, highlighting the impact of mortgage lender imposed borrowing constraints. The data set is a panel of youth age 20-33 for the years 1985-90. Our methods differ from most prior studies in many ways including consideration of possible sample selection bias, a richer model of the stochastic error structure, better measurement of which households are bound by borrowing constraints, and a fuller consideration of the endogeneity of wealth and income. Once all changes are implemented, we find ownership tendencies to be quite sensitive to economic variables. Specifically, potential earnings, the relative cost of owning a home, and especially borrowing constraints affect the tendency to own a home. In our sample of youth, 37% of households are constrained even after choosing their loan-to-value ratio to minimize the impact of the separate wealth and income requirements. The constraints reduce the probability of ownership of these households by 10 to 20 percentage points (a third to a half) depending on the particular characteristics of the household.

Wealth Accumulation and Housing Choices of Young Households: An Exploratory Investigation (with Donald R. Haurin, Patric H. Hendershott)   Abstract  
Journal of Housing Research, Vol. 7.1, 1996, 33-57

This article describes the wealth accumulation of American youth and relates it to their eventual housing choices. A data set is compiled for youth ages 20 to 33 for the years 1985 through 1990. We construct wealth profiles for each household and compare these profiles across different patterns of labor supply, marriage, fertility, gender, education, race/ethnicity, and tenure choic. We find that renters’ wealth accumulates rapidly in the year before and year of first homeownership. The factors related to this increase are marriage, increased labor supply by married women, and gifts and inheritance. Of particular interest is the finding of an inverse U-shaped relationship between the local price of housing and middle- and upper-income renters’ wealth. However, there is no relationship between these variables for low-income renters. One difference between these groups is that low-income renters have no tax advantage once they become homeowners.

The Impacts of Borrowing Constraints on Home Ownership (with Peter Linneman)   Abstract  
American Real Estate and Urban Economics Association Journal, Winter 1989, Vol 17.4, 389-402

This paper utilizes micro data to directly quantify the impact of mortgage underwriting criteria on individual homeownership propensities. To determine whether a family is constrained by these criteria, the optimal home purchase price is estimated. The results indicate that wealth and income constraints both reduce homeownership propensities, with a stronger impact for wealth constraints. Mortgage market innovations of the early 1980s seem to have reduced these effects. The research indicates, however, that even in well-developed capital markets, the presence of borrowing constraints adversely affects homeownership propensities.