Land use regulations and the returns to low-income homeownership

Abstract

I investigate the relationship between land use regulations and the house prices of urban low-income homeowners in the United States between 1998 and 2010. Because low-income homeowners generally hold a larger fraction of their wealth as home equity and are less likely to sustain homeownership, the overall financial position of this population is especially dependent on house price movements during short holding periods and the timing of house purchase and sale. The data used for analysis include zip-code-level house price estimates provided by Fannie Mae and proprietary mortgage origination data for a representative sample of low-income US homeowners who received community reinvestment mortgages between 1998 and 2004. I estimate a series of linear mixed-effects models to predict house price appreciation and the risk premium associated with investment in housing as opposed to a risk-free asset. Controlling for a variety of related factors, including land scarcity and subprime lending activity, I find that land use regulations are associated with greater house price volatility and a greater risk premium for urban low-income households. Thus, the results suggest that the dependence of low-income homeowner wealth on the timing of house purchase and sale is weaker in less regulated markets.