The Uneven Impact on Households
Edited by Ray Forrest and Ngai-Ming Yip
Chapter 2: Effects of the Recent Credit Cycle on Homeownership Rates Across Households: What We Know and What We Expect
2. Effects of the recent credit cycle on homeownership rates across households: what we know and what we expect Doug Duncan and Cesar Costantino* INTRODUCTION After 1994, the homeownership rate in the USA departed from its historical secular pattern and increased from 64.0 percent in that year to a peak of 69.0 percent in 2004. Although it is currently trending down, the US homeownership rate is still above the levels recorded before 1998. This chapter summarizes its history and explains what factors are behind its recent behavior. Once a new household is formed, the decision to own versus to rent would be determined only by the relative cost of each alternative if the housing units were the same in location and characteristics, and there were no frictions in the credit markets. However, housing units are different in location and characteristics almost by definition. Moreover, in many cities rental housing often is very different than the rest of the housing inventory, and these differences end up affecting tenure choice. Finally, credit markets are not frictionless, thus households most often need to pass a number of screening tests, for example meeting credit-risk score requirements, and be ready to hold an equity position in the investment if they want to become homeowners. All these factors contribute to the tenure decision of a household. The aggregate homeownership rate is just the average across all households. If households were homogeneous, we would be able to infer directly the aggregate homeownership rate from any household’s tenure...
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