Accounting for Changes in the Homeownership Rate

Abstract

After three decades of being relatively constant, the homeownership rate increased over the period 1994 to 2005 to attain record highs.The objective of this paper is to account for the observed boom in ownership by examining the role played changes in demographic factors and innovations in the mortgage market which lessened downpayment requirements.To measure the aggregate and distributional impact of these factors, we construct a quantitative general equilibrium overlapping generation model with housing.We …nd that the long-run importance of the introduction of new mortgage products for the aggregate homeownership rate ranges from 56 and 70 percent.Demographic factors account for between 16 and 31 percent of the change.However, demographic factors alone are not able to account for the age distributional changes in homeownership.Transitional analysis suggests that demographic factors play a more important, but not dominant, role the further away from the long-run equilibrium.Distributionally, mortgage market innovations have a larger impact explaining participation rate changes of younger households, while demographic factors seem to be the key to understanding the participation rate changes of older households.Our analysis suggests that the key to understanding the increase in the homeownership rate is the expansion in the set of mortgage contracts.We test the robustness of this result by considering changes in mortgage …nancing after 1940.We …nd that the introduction of the conventional …xed rate mortgage, which replaced balloon contracts, accounts for at least …fty percent of the observed increase in homeownership during that period.

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