The Causes of Increase in Homeownership in the 1990s

Title: The Causes of Increase in Homeownership in the 1990s

Date: 10/1/2003

Author(s): James L. Freund

Executive Summary:

The Research Institute of America is please to present the results of a study by Professors Stuart Rosenthal of Syracuse University and Stuart Gabriel of the University of Southern California, "Causes of the Increase in Homeownership in the 1990s: A Retrospective View." The purpose of the study was to examine how, and why, homeownership rates changed in the 1990s. The study used extensive data from the Federal Reserve Board's Survey of Consumer Finances (SCF).

Homeownership rates rose roughly 3-1/2 percentage points in the U.S. between 1989 and 2001. The rise coincided with shifts in the composition of the population, innovations in mortgage finance, and the economic boom of the 1990s. Using six waves of the Survey of Consumer Finances, the authors analyze the determinants of changes in homeownership rates in the 1980s and 1990s, with particular attention to racial gaps in homeownership. With respect to minorities, white-minority gaps in homeownership rates remained at or above 25 percentage points throughout the 1980s and 1990s. Moreover, by the end of the 1990s, demographic and financial attributes accounted for all but roughly 8 percentage points of the racial disparity in homeownership. Of that residual, credit barriers account for no more than 5 percentage points. Results also indicate that changes in the demographic and financial attributes of the population account for most of the increase in demand for homeownership in the 1990s. The results also indicate that minority renters saving behavior relating to home purchase changed markedly over the decade of the 1990s.

Among the highlights of the overall study include:

  1. The statistical analysis conducted by the authors suggests that by far the most important reasons behind the 3-1/2 percentage point increase in the overall homeownership rate reported by the Federal Reserve data was the improved economic and financial status of households associated with higher incomes, better employment opportunities, and demographic changes such as the aging of baby boomers into prime homeownership years. These and like factors explain nearly all of the overall increase in homeownership rates in the 1990s.
  2. The authors' past work suggest that households with blemished credit records and with recent experiences of being constrained in their ability to obtain credit often face barriers to homeownership . The study found that this barrier did not go away in the 1990s. Better economic conditions and mortgage market innovations to accommodate households with impaired credit records did diminish the effects of credit problems during much of the decade. However, those gains were reversed between 1998 and 2001, perhaps by the delayed effects of increasing debt burdens and by a slowing economy in the early part of the new decade.
  3. The Rosenthal and Gabriel find that the gaps between white and both Hispanic and Black homeownership rates in 2001 were not much reduced from 1989. However, the study does yield some positive news with regard to minority homeownership. While the study suggests that credit problems continue to be a barrier to homeownership for many families, by 2001 the disproportionate influence of credit barriers on homeownership for blacks relative to whites largely has disappeared.
  4. Another important finding was the discovery of a sharp increase in the number of minority renter households that are saving for a home purchase . The proportion of white households saving for this purpose remained in the 15 to 20 percent range throughout most of the 1983-2001 period. In contrast, only 8.6 percent of blacks and 11.6 percent of Hispanics were doing so in the early 1980s. By 2001 the fraction of minority renters who were saving to purchase a home equaled or exceeded that of white renters, according to the research results.

An interesting finding was that the results did not suggest that any fundamental increase in household demand for homeownership took place in the 1990s. This is a surprising result given that households faced much reduced financing costs, many new mortgage instruments, and the emphasis on homeownership by both the media and political leaders. The authors point out, however, that such these factors still could have had a positive effect on the cost of mortgage credit for new homeowners and also may well have made it possible to obtain homeownership earlier. Nonetheless, this finding does not agree with results from other studies. It is hoped that future work will verify or better relate the finding of this study with respect to household tenure choice, given their financial and demographic status.