While there has been considerable research empirically quantifying and simulating the role of borrowing constraints on homeownership rates, the primary focus of this work has been on measuring the relative importance of income and wealth constraints with respect to ownership outcomes. An important gap in the literature the role of credit quality has largely gone uninvestigated. Also missing from the literature is an assessment of recent trends; that is, of the degree to which the effects of borrowing constraints on homeownership may have changed over the past decade.
While micro-level household data on wealth and income are available for assessing income and wealth-based constraints to homeownership, lack of data on household credit ratings has precluded evaluation of credit quality as a potential barrier to homeownership. Thus, questions of the importance of credit quality as a borrowing constraint, both alone and interacting with other financial constraints, and the importance of omitting a credit quality measure from assessments of the significance of other borrowing constraints have not been examined.
A key goal of this paper is to quantify the importance of credit quality as a factor in limiting access to homeownership. The data problem that has hampered previous research is overcome through the use of a special sample of individual credit records from which we develop a credit score imputation model. This credit score estimation technique allows for the derivation of a pseudo credit score for each respondent in our sample, which is drawn from the Survey of Consumer Finances. We then empirically estimate tenure outcome equations including these estimates of household credit quality along with other financial constraints to advance our understanding of how and why such constraints matter in homeownership. This research thus allows for an important advancement in the understanding of how homeownership is achieved.
The role of financing constraints also is of interest to academic researchers and policy analysts seeking to understand recent homeownership trends and design policies that may influence future trends. Although homeownership rates increased over the 1990s (from 64% to an historic high of 67%), there is policy interest in further expanding access to homeownership, as evidenced by the American Dream initiative put forth by President Bush. There is also ongoing debate about the source of increasing homeownership rates. For example, Bostic and Surette (2001) find that demographic factors explain a substantial portion of the recent upswing in homeownership rates for higher income households but cannot account for increases among lower income households. They argue that this suggests that there is a potential explanatory role for recent changes in outreach by lending institutions, including the increased availability of "affordable" low down payment mortgages. Zorn (2002) points to a role for the increased use of automated underwriting using credit scoring models, which allow for better risk assessment and help to reduce origination costs. This paper also estimates the role of financial constraints over time to examine the possible impact of these institutional shifts.
The paper proceeds by summarizing the empirical literature in section 2. The description of data sources follows in section 3 and methodology is described in section 4. We present results in section 5 and briefly conclude in section 6.
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