After three decades of being relatively constant, the homeownership rate increased over the 1994–2005 period to attain record highs. The objective of this paper is to account for the observed boom in ownership by examining the role played by changes in demographic factors and innovations in the mortgage market that lessened down payment requirements. To measure the aggregate and distributional impact of these factors, we construct a quantitative general equilibrium overlapping-generation model with housing. We find that the long-run importance of the introduction of new mortgage products for the aggregate homeownership rate ranges from 56 percent to 70 percent. Demographic factors account for between 16 percent and 31 percent of the change. Transitional analysis suggests that demographic factors play a more important but not dominant role farther from the long-run equilibrium. From a distributional perspective, mortgage market innovations have a larger impact on participation rate changes of younger households, and demographic factors seem to be the key to understanding the participation rate changes of older households. Our analysis suggests that the key to understanding the increase in the homeownership rate is the expansion of the set of mortgage contracts. We test the robustness of this result by considering changes in mortgage financing after World War II. We find that the introduction of the conventional fixed-rate mortgage, which replaced balloon contracts, accounts for at least 50 percent of the observed increase in homeownership during that period.
JEL classification: E0, D58, D91, R21
Key words: macroeconomics, housing
The authors acknowledge the useful comments of Dirk Krueger, David Marshall, Ed Prescott, Victor Ríos-Rull, Eric Young, and three anonymous referees. A version of this paper was presented at the 2004 Annual Meetings of the Society for Economic Dynamics, Iowa State University, the University of Virginia, and the State University of New York at Stony Brook. We are grateful for the financial support of the National Science Foundation for grant number SES-0649374. Carlos Garriga also acknowledges support from the Spanish Ministerio de Ciencia y Tecnología through grant number SEJ2006-02879. The views expressed here are the authors' and not necessarily those of the Federal Reserve Banks of Atlanta or St. Louis or the Federal Reserve System. Any remaining errors are the authors' responsibility.
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