The Importance of Wealth and Income in the Transition to Homeownership
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.