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Hitting the Wall: Credit as an Impediment to Homeownership

Working paper #482
Raphael W. Bostic, Paul S. Calem and Susan M. Wachter

Representing the “American Dream,” homeownership has long held a special place in the United States. A significant fraction of the typical American household’s wealth is wrapped up in its primary residence, which makes homeownership a vital investment tool. Moreover, homeownership has been found to have ancillary benefits, such as better health outcomes for members of a homeowner’s family, and a lower incidence of neighborhood challenges such as crime and blight. These perceived benefits have been the motivation for the many homeownership incentives extended by all levels of government, including the mortgage interest deduction for federal income tax calculations and the Bush Administration’s American Dream Downpayment Initiative, whose goal is to dramatically increase homeownership rates among lower-income households.

Given the important role that homeownership plays for households and communities, overcoming barriers to homeownership is an important social and public policy goal. This is especially true in the case of minority and lower-income communities, many of which have struggled to build and maintain the wealth and stability that homeownership has been shown to confer. Identifying how changing credit quality—poor credit quality being one of the major financial barriers to homeownership that households must overcome—may be impacting access to homeownership across demographic groups is a key step to informing policies to overcome these barriers.

Important changes in consumer credit markets, including expanded access to bank revolving credit, the emergence of a sub-prime market, larger debt burdens among some segments of the population, and increased bankruptcy rates, occurred between 1989 and 2001. These changes all have implications for the distribution of credit quality across the population. This article examines how credit quality has evolved during this period. The focus is on the distribution of credit quality and the incidence of poor credit quality, with an eye toward identifying those segments of the population that have seen significant improvements or setbacks over the past decade. The results of the analysis are considered in the context of homeownership and the success of policy initiatives designed to increase the homeownership rate. Given areas of current policy focus, a central issue is the experience of minority and lower-income individuals and their prospects looking forward.

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