The Importance of Wealth and Income In the Transition to Homeownership

Acknowledgements The authors would like to thank Christopher Herbert and Eric Belsky for helpful advice and editing. iii iv Executive Summary 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 …