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Endogenous Mortgage Choice, Borrowing Constraints and the Tenure Decision

Author

Listed:
  • William C. LaFayette
  • Donald R. Haurin
  • Patric H. Hendershott

Abstract

Earlier research has shown that lender income and wealth constraint ratios discourage homeownership. This empirical research has been based on home purchasers using an 80 percent loan-to-value (LTV) fixed-rate conventional loan. Employing the same assumption, we find that the constraints lowered the ownership rate of our 1919 young home purchasers by about 20 percentage points. However, households are not restricted to putting 20 percent down and choosing a fixed- rate loan. When we allow households to select the optimal LTV and mortgage type (adjustable or fixed-rate with Federal Housing Administration (FHA) or conventional insurance), the percentage of our sample that is credit constrained declines from 71 to 49. Moreover, the measured impact on the homeownership rate of the constraints falls to only 4 percentage points. Further, FHA loans are estimated to increase homeownership by only 0.1 to 0.2 percentage points.

Suggested Citation

  • William C. LaFayette & Donald R. Haurin & Patric H. Hendershott, 1995. "Endogenous Mortgage Choice, Borrowing Constraints and the Tenure Decision," NBER Working Papers 5074, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:5074
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    References listed on IDEAS

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    1. Patric H. Hendershott & William C. LaFayette, 1995. "Debt Usage and Mortgage Choice: Sensitivity to Default Insurance Costs," NBER Working Papers 5069, National Bureau of Economic Research, Inc.
    2. Lawrence D. Jones, 1989. "Current Wealth and Tenure Choice," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(1), pages 17-40.
    3. Peter Linneman & Susan Wachter, 1989. "The Impacts of Borrowing Constraints on Homeownership," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(4), pages 389-402.
    4. Donald R. Haurin & Patric H. Hendershott & David C. Ling, 1987. "Homeownership Rates of Married Couples: An Econometric Investigation," NBER Working Papers 2305, National Bureau of Economic Research, Inc.
    5. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
    6. Haurin Donald R. & Hendershott Patric H. & Kim Dongwook, 1994. "Housing Decisions of American Youth," Journal of Urban Economics, Elsevier, vol. 35(1), pages 28-45, January.
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    Citations

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    Cited by:

    1. Goodman, John Jr. & Nichols, Joseph B., 1997. "Does FHA Increase Home Ownership or Just Accelerate It?," Journal of Housing Economics, Elsevier, vol. 6(2), pages 184-202, June.
    2. Gobillon, Laurent & le Blanc, David, 2008. "Economic effects of upfront subsidies to ownership: The case of the Prêt à Taux Zéro in France," Journal of Housing Economics, Elsevier, vol. 17(1), pages 1-33, March.
    3. John M. Quigley, 2006. "Federal credit and insurance programs: housing," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 281-310.
    4. Renata Bottazzi, 2004. "Labour market participation and mortgage related borrowing constraints," IFS Working Papers W04/09, Institute for Fiscal Studies.
    5. Hendershott, Patric H., 1996. "Introduction and overview," Regional Science and Urban Economics, Elsevier, vol. 26(3-4), pages 227-234, June.
    6. Joseph Nichols, 2004. "A Life-cycle Model with Housing, Portfolio Allocation, and Mortgage Financing," Econometric Society 2004 North American Winter Meetings 205, Econometric Society.
    7. Joseph B. Nichols, 2007. "Nominal mortgage contracts and the effects of inflation on portfolio allocation," Finance and Economics Discussion Series 2007-67, Board of Governors of the Federal Reserve System (U.S.).
    8. Job Swank & Jan Kakes & Alexander F. Tieman, 2002. "The housing ladder, taxation, and borrowing constraints," MEB Series (discontinued) 2002-9, Netherlands Central Bank, Monetary and Economic Policy Department.
    9. Juan Mora-Sanguinetti, 2012. "Is judicial inefficacy increasing the weight of the house property market in Spain? Evidence at the local level," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 3(3), pages 339-365, September.

    More about this item

    JEL classification:

    • R20 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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