2001
Abstract:
As a stated policy objective, the U.S. Department of Housing and Urban
Development seeks to boost the national homeownership rate to 70 percent by 2006. To
accomplish this goal, they estimate that 3.8 million additional families be added to the
ranks of U.S. homeowners. Furthermore, HUD estimates that the homeownership gap
between minority and nonminority families must be reduced by a full 15 percent. Many
policy instruments – both targeted and otherwise – have been suggested to increase
homeownership. These range from low downpayment loans, greater access to credit in
underserved areas, and interest rates subsidies. However, little is know about the efficacy
of these measures to raise long-term homeownership rates.
In this analysis, we focus on the role of interest rates on homeownership rates and
the housing stock. In particular, we provide a critical review of the literature on the
relationship between housing and interest rates in contrast to other determinants of
homeownership and changes in housing supply. We then present our own estimates of
the influence of interest rates on homeownership and housing starts. We find that interest
rates play little direct role in changing homeownership rates. While changes in interest
rates may affect the timing of changes in tenure status from renter to owner, the long-run
ownership rate appears independent of interest rates.
We find housing starts are, however, sensitive to changes in the interest rate. This
implies that housing supply, or at least the timing of changes in housing supply, is
sensitive to interest rates. It is though this mechanism that the stock of owner-occupied
housing expands, though household formation and immigration may leave the ownership
rate unchanged. We conclude by discussing whether other instruments, such as low
down payment loans and improved technology for assessment of credit risk, may
potentially be better suited to increasing long-term homeownership rates.
