First-time Homebuyers Research Articles

Correlated Leverage and Its Ramifications

This paper develops a theory in which housing prices, the capital structures of banks that make mortgage loans and the capital structures of borrowers who take these loans are all endogenously determined in equilibrium. There are four main results. First, leverage is a "positively correlated" phenomenon in that high leverage among borrowers is positively correlated with high leverage among banks. Both borrower and bank leverage are higher when house prices are higher. First-time homebuyers with fixed wealth endowments must borrow more to buy more expensive homes, whereas higher current house prices rationally imply higher expected future house prices and therefore higher collateral values, inducing banks to be more highly levered. Second, higher bank leverage leads to greater volatility of house prices in response to shocks to fundamental house values. Third, a bank's exposure to credit risk depends not only on its own leverage but also on the leverage decisions of other banks. Fourth, positive fundamental shocks to house prices dilute financial intermediation by reducing banks' pre-lending screening, and this reduction in bank screening further increases house prices. Empirical and policy implications of the analysis are drawn out, and empirical evidence is provided for the first two predictions. The key policy implications are that greater geographic diversification by banks, tying mortgage tax exemptions to the duration of home ownership, and increasing bank capital requirements when borrower leverage is high can help reduce house price volatility.

Capitalization of Seller-Paid Concessions Near the Recent Peak of the Housing Bubble

Using listing price as a proxy to the market value of residential housing, this studyexamines the extent to which seller-paid concessions are capitalized into the final sellingprice of residential real estate. The central hypothesis of this work is that amounts paidby the seller toward closing cost, discount points or down payment are capitalized intothe selling price. First-time home buyers, however, particularly during a period whenhome financing is plentiful, are willing to pay a liquidity premium on concessions paidby the seller. The empirical results are consistent with the hypothesis of the paper.

Financial capital democratisation: recipes for growth and disaster

The broadening of access to financial capital otherwise known as financial capital democratisation (FCD), has been receiving increasingly more attention, especially from those who are concerned about poverty, community development and development of entire nations. This concept has also its roots in ethical and religious based economic systems. In this paper we review various FCD systems. Our main conclusions are that the current crisis is due to severe adverse selection and moral hazard problems, that a new theory calling for acquisition of financial capital with the future earnings of capital sounds promising, the impact of the CRA in the USA is mostly negative, first-time home buyer grants as well as ESOPs and stock options in the work place have achieved some success and that micro financing is good for individual small-scale entrepreneurs but not sufficient for the alleviation of poverty in a developing nation. The paper also explores Islamic financing concepts and analyses its roots in FCD application, given wider interest generated for such financing techniques during the recent market upheavals when Islamic financial institutions seemed less affected by the crisis.

Buyers' Propensity-to-Buy in the Housing Industry

This article: 1) develops new psychological theories and mathematical models that can explain many of the legal and economic problems that occurred in the US housing industry between 2000 and the present - such as the sub-prime loan problems, predatory lending, mortgage fraud, title defects, rapid/un-warranted price increases and sales fraud; 2) analyzes and identifies the psychological and behavioral biases of first-time homebuyers and repeat home buyers, 3) develop new theories (testable hypothesis) of psychological effects and Biases inherent in the housing purchase/sale process; 4) introduces new theoretical mathematical models for Buyers' Propensity-To-Purchase. This study involves analysis of historical economic trends, critique of existing methods and theories, and development of new theories and development of mathematical models. This article also partly relies on surveys and published empirical research using US macroeconomic and housing data from the 1995-2003 period. At the present time, the models developed in this article cannot be realistically tested empirically because real estate data and price series and psychological effects described in the models (and associated periodic changes in such data or the logarithms of such data) don't fit known distributions and regression techniques.

First-Time Home Buyers and Residential Investment Volatility

Like other macroeconomic variables, residential investment has become much less volatile since the mid-1980s (recent experience notwithstanding.) This paper explores the role of structural change in this decline. Since the the early 1980s there have been many changes in the underlying structure of the economy, including those in the mortgage market which have made it easier to acquire a home. We examine how these changes affect residential investment volatility in a life-cycle model consistent with micro evidence on housing choices. We find that a decline in the rate of household formation, increased delay in marriage, and an increase in the cross-sectional variance of earnings drive the decline in volatility. Our findings provide support for the view that the Great Moderation in aggregate fluctuations is not just due to smaller aggregate shocks, but is driven at least in part by structural change.

Washington, D.C.'s First-Time Homebuyer Tax Credit: An Assessment of the Program

This study is the first, comprehensive assessment of the District of Columbia First-Time Homebuyer Credit program. This program is the only federal program that provides an income tax credit (up to $5,000) for targeted low/moderate-income families and individuals to purchase their first homes in a central city. The key findings indicate that: The DC homebuyer tax credit is very successful and popular. There was a total of 21,821 claims (in the amount of $76.7 millions) filed for the tax credit during the 1997-2001 period. The DC's first-time homebuyer rate stemming from this program was estimated at 67 percent, or 16 percent higher than the central city average in the nation (51%) and 27 percent higher than the national avearge (40%). The largest cluster of the credit beneficiaries were low-income homebuyers or those with incomes between $30,000 and $50,000. Moreover, the DC homebuyer tax credit program contributed the house price appreicaiton by about 4.9 percent per year, after adjusted for housing and neighborhood characteristics and other factors. Larger effects on house prices are observed in low/moderate-income and minority neighborhoods. The homeowners of (lower-priced) townhouse/condos also experienced better appreciation than the owners of (more expensive) single family detached units. Furthermore, the program helped stabilize distressed neighborhoods, increase the overall homeownership rate, drive up homeowner housing supply through new construction and conversion of rental into owner units, and reduce vacant housing units for rent in the District of Columbia.

Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market

The U.S. mortgage market has experienced phenomenal change over the last 35 years. Most observers believe that the deregulation of the banking industry and financial markets generally has played an important part in this transformation. One issue that has received particular attention is the role that the housing Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, have played in the development of a secondary market in mortgages. This paper develops and implements a technique for assessing the impact of changes in the mortgage market on individuals and households. ; Our analysis is based on an implication of the permanent income hypothesis: that the higher a household’s future income, the more it desires to spend and consume, ceteris paribus. If we have perfect credit markets, then desired consumption matches actual consumption and current spending on housing should forecast future income. Since credit market imperfections mute this effect, we can view the strength of the relationship between housing spending and future income as a measure of the “imperfectness” of mortgage markets. Thus, a natural way to determine whether mortgage market developments have actually helped households by decreasing market imperfections is to see whether this link has strengthened over time. ; We implement this framework using panel data going back to 1969. We find that over the past several decades, housing markets have become less imperfect in the sense that households are now more able to buy homes whose values are consistent with their long-term income prospects. However, we find no evidence that the GSEs’ activities have contributed to this phenomenon. This is true whether we look at all homebuyers, or at subsamples of the population whom we might expect to benefit particularly from GSE activity, such as low-income households and first-time homebuyers.

Do First-Time Home Buyers Improve Their Neighborhood Quality?

ABSTRACT:This study examines the changes in neighborhood quality in communities where low-income buyers have recently purchased homes. Three questions are addressed: Do lower-income buyers buy in higher quality neighborhoods than the ones in which they rented? Are lower-income buyers locating in higher quality neighborhoods than a comparison group of continuing renters? Are the neighborhoods of new buyers improving or deteriorating relative to those of continuing renters? Results of an analysis of a sample of persons who graduated from home buyer education classes in eight cities indicate that home buyers located in neighborhoods that were similar in quality to those in which they rented. Continuing renters in the sample, however, improved the quality of the neighborhoods between the first and second surveys, while home buyers did not. Finally, while the neighborhoods to which new buyers moved are improving, they are doing so at a slower rate than both the neighborhoods from which they moved and those of the continuing renters.

Federal Credit and Insurance Programs: Housing

This paper reviews the evolution of the major credit and insurance programs undertaken by the U.S. government in support of urban housing. As the review makes clear, the Federal Housing Administration (FHA), Veterans Administration, Federal National Mortgage Association, and Federal Home Loan Mortgage Corporation have played major roles in the development of liberal and efficient primary and secondary mortgage markets in the United States. The development of capacity in mortgage lending and securitization in the private sector does suggest, however, that federally subsidizing mortgage market activities can be restrained with little effect on homeownership- the principal goal of this federal activity. In particular, the orderly reduction in the mortgage investment activities of the government-sponsored enterprises (GSEs) and the imposition of guarantee fees on mortgage-backed securities insured by the GSEs are first steps in restraining federal activity. More generally, a concentration of FHA and GSE activity on first-time homebuyers would reduce federal risk exposure while preserving the economic rationale for government activity.

Determining Satisfaction Outcomes for Counseled First-Time Home Buyers

Various affordable housing initiatives have become available throughout the country since the mid-1990s, with housing counseling offered as a way of preparing low- and moderate-income families for the responsibilities of homeownership. The housing counseling industry increasingly allows low- and moderate-income households the opportunity to experience homeownership for the first time. Evaluative efforts of housing counseling have focused primarily on its financial aspects and have largely ignored the results related to one’s choice of housing and community quality. This research examined home buyers’ dwelling unit and neighborhood satisfaction after receiving compulsory housing counseling services through an innovative downpayment assistance program. The results of the study revealed that borrowers who attended housing counseling sessions were satisfied with their respective dwelling units and neighborhoods on both an absolute basis and when compared with their previous homes and neighborhoods. In addition, counseled borrowers moved to neighborhoods with improved socioeconomic characteristics when compared to their previous residences.

Policy Review: Government Intervention in Housing: The Case of Macao

This is a review of how the Macao government helped the housing market digest its property oversupply in the early 1990s when Chinese macro-economic policy sought to control financial flows. The housing sector is one of the most significant local public revenue sources in Macao. Its collapse would seriously impact on the property sector and trigger an adverse effect on the economy of Macao. Fearing an imminent economic slump, the government was urged by various housing developers and concerned local parties to intervene and re-activate the flagging housing market. The government, for its part, had realized beforehand the need for an immediate strategy to stimulate the market, and thus launched and implemented the 4 per cent Interest Rate Subsidy Scheme to first-time homebuyers in August 1996. After six years of handing out subsidies to first-time homebuyers, the scheme ended in June 2002, having had an obvious positive impact on the property market: a revived local market dynamic as well as a boost in investment.

Questioning the Effectiveness of Mandatory Agency Disclosure Statutes

This paper examines the topic of agency disclosure based on the results of the NationalAssociation of Realtors® 2004 Home Buying and Selling Survey. Currently, the practice ofagency disclosure is required by statute in 49 out of 50 states. However, the findings ofthis study indicate that there are some problems with the effectiveness of currentpractices. In particular, the level of reported agency disclosure is found to varysubstantially from one state to the next. In addition, certain cohorts within the homebuying population such as first-time home buyers, Asians, Hispanics, and elderly buyersreport disclosure at significantly lower rates than the rest of the population. Possibleexplanations for these findings are provided.

Is There a Bubble in the Housing Market?

THE POPULAR PRESS is full of speculation that the United States, as well as other countries, is in a that is about to burst. Barrons, Money magazine, and The Economist have all run recent feature stories about the irrational run-up in home prices and the potential for a crash. The Economist has published a series of articles with titles like Castles in Hot Air, House of Cards, Bubble Trouble, and Betting the House. These accounts have necessarily raised concerns among the general public. But how do we know if the housing market is in a bubble? The term is widely used but rarely clearly defined. We believe that in its widespread use the term refers to a situation in which excessive public expectations of future price increases cause prices to be temporarily elevated. During a housing price bubble, homebuyers think that a home that they would normally consider too expensive for them is now an acceptable purchase because they will be compensated by significant further price increases. They will not need to save as much as they otherwise might, because they expect the increased value of their home to do the saving for them. First-time homebuyers may also worry during a housing bubble that if they do not buy now, they will not be able to afford a home later. Furthermore, the expectation of large price increases may have a strong impact on demand if people think that home prices are very unlikely to fall, and certainly not likely to fall for long, so that there is little perceived risk associated with an investment in a home. If expectations of rapid and steady future price increases are important motivating factors for buyers, then home prices are inherently unstable. Prices cannot go up rapidly forever, and when people perceive that prices have stopped going up, this support for their acceptance of high home prices could break down. Prices could then fall as a result of diminished demand: the bubble bursts. At least one aspect of a housing bubble--the rapid price increases--has clearly been seen recently. A rapid surge in home prices after 2000, as tabulated, for example, by the Economist Intelligence Service, has been seen in almost all the advanced economies of the world, with the exception of Germany and Japan. In some of these countries, price-to-rental ratios and price-to-average income ratios are at levels not seen since their data begin in 1975. (1) But the mere fact of rapid price increases is not in itself conclusive evidence of a bubble. The basic questions that still must be answered are whether expectations of large future price increases are sustaining the market, whether these expectations are salient enough to generate anxieties among potential homebuyers, and whether there is sufficient confidence in such expectations to motivate action. In addition, changes in fundamentals may explain much of the increase. As we will show, income growth alone explains the pattern of recent home price increases in most states. Falling interest rates clearly explain much of the recent run-up nationally; they can also explain some of the cross-state variation in appreciation because of differences in the elasticities of supply of homes, including land. To shed light on whether the current boom is a bubble and whether it is likely to burst or deflate, we present two pieces of new evidence. First, we analyze U.S. state-level data on home prices and the fundamentals, including income, over a period of seventy-one quarters from 1985 to 2002. Second, we present the results of a new questionnaire survey conducted in 2003 of people who bought homes in 2002 in four metropolitan areas: Los Angeles, San Francisco, Boston, and Milwaukee. The survey replicates one we did in these same metropolitan areas in 1988, during another purported housing bubble, after which prices did indeed fall sharply in many cities. The results of the new survey thus allow comparison of the present situation with that one. …

Comments and Discussion

Is There a Bubble in the Housing Market? Karl E. Case and Robert J. Shiller The popular press is full of speculation that the United States, as well as other countries, is in a “housing bubble” that is about to burst. Barrons, Money magazine, and The Economist have all run recent feature stories about the irrational run-up in home prices and the potential for a crash. The Economist has published a series of articles with titles like “Castles in Hot Air,” “House of Cards,” “Bubble Trouble,” and “Betting the House.” These accounts have necessarily raised concerns among the general public. But how do we know if the housing market is in a bubble? The term “bubble” is widely used but rarely clearly defined. We believe that in its widespread use the term refers to a situation in which excessive public expectations of future price increases cause prices to be temporarily elevated. During a housing price bubble, homebuyers think that a home that they would normally consider too expensive for them is now an acceptable purchase because they will be compensated by significant further price increases. They will not need to save as much as they otherwise might, because they expect the increased value of their home to do the saving for them. First-time homebuyers may also worry during a housing bubble that if they do not buy now, they will not be able to afford a home later. Furthermore, the expectation of large price increases may have a strong impact on demand if people think that home prices are very unlikely to fall, and certainly not likely to fall for long, so that there is little perceived risk associated with an investment in a home. [End Page 299] If expectations of rapid and steady future price increases are important motivating factors for buyers, then home prices are inherently unstable. Prices cannot go up rapidly forever, and when people perceive that prices have stopped going up, this support for their acceptance of high home prices could break down. Prices could then fall as a result of diminished demand: the bubble bursts. At least one aspect of a housing bubble—the rapid price increases—has clearly been seen recently. A rapid surge in home prices after 2000, as tabulated, for example, by the Economist Intelligence Service, has been seen in almost all the advanced economies of the world, with the exception of Germany and Japan. In some of these countries, price-to-rental ratios and price-to-average income ratios are at levels not seen since their data begin in 1975.1 But the mere fact of rapid price increases is not in itself conclusive evidence of a bubble. The basic questions that still must be answered are whether expectations of large future price increases are sustaining the market, whether these expectations are salient enough to generate anxieties among potential homebuyers, and whether there is sufficient confidence in such expectations to motivate action. In addition, changes in fundamentals may explain much of the increase. As we will show, income growth alone explains the pattern of recent home price increases in most states. Falling interest rates clearly explain much of the recent run-up nationally; they can also explain some of the cross-state variation in appreciation because of differences in the elasticities of supply of homes, including land. To shed light on whether the current boom is a bubble and whether it is likely to burst or deflate, we present two pieces of new evidence. First, we analyze U.S. state-level data on home prices and the “fundamentals,” including income, over a period of seventy-one quarters from 1985 to 2002. Second, we present the results of a new questionnaire survey conducted in 2003 of people who bought homes in 2002 in four metropolitan areas: Los Angeles, San Francisco, Boston, and Milwaukee. The survey replicates one we did in these same metropolitan areas in 1988, during another purported housing bubble, after which prices did indeed fall sharply in many cities. The results of the new survey thus allow comparison [End Page 300] of the present situation with that one. Our survey also allows us to compare metropolitan areas...

Encouraging Mortgage Lending in 'Underserved' Areas: The Potential for Expanding Home Ownership in the US

This study estimates the size of the potential US home owner market and examines the relative default risks associated with expanded home ownership among lower-income, 'underserved' households. Using the 1990 SIPP database, a logit model is developed that predicts the likelihood that a renter household will move into home ownership during an 18-month period. Parameters are estimated using a white, suburban renter sub-population. These are then applied to a nationally-representative sample of renter householdsto produce an aggregate,expected number of transitions into home ownership. The difference between this expected number and the actual number of transitions represents the baseline estimate of the number of additional transitions that might be expected were lending practices and conditions prevailing for whites in suburban areas to be applied everywhere else. The relative default risks are assessed of these potential home owners and the renter households who moved into home ownership by applying a well-known default probability equation. The resulting distributions of default probabilities are then compared, using low- and median-priced housing cost assumptions and for several income groups. In the extended phase of the analysis, an estimation is made of various pools of prospective home owners that might be tapped with more aggressive lending policies. These prospective home owners have both a large propensity to make the move into home ownership (relative to those that actually do), and do not present above average default risks were they to do so. The baseline analyses indicate that just over 600 000 (2.1 per cent) more US renter households would become home owners during the period if they could buy low-cost homes and the underwriting practices and opportunitiesfound in white suburban areas were applied uniformly across the nation. If they were limited to purchase of a median-cost home, this figure drops slightly to 522 000 (1.85 per cent). Extended analyses suggest that up to 2.71 million low-to-moderateincome renter households (7.6 per cent of all renter households) should prove more attractive to mortgage lenders than the average first-time home buyer and possess a relatively high probability of moving into home ownership.

Home buyers' characteristics and selling prices

This study examines the relationship between home buyers' characteristics and selling prices. Using survey on home buyers and the 1990 Multiple Listing Service data on single-family housing transactions in the Reno-Sparks area in Nevada, this study finds that home buyers play a significant role on housing price determination. For a given type of house, higher income home buyers would pay higher prices than lower income home buyers and first-time home buyers would pay lower prices than repeat home buyers.

The Graduated-Payment Mortgage: Solving the Initial Payment Enigma

Executive Summary: The graduated-payment mortgage (GPM) has a unique stair-step payment schedule that often enhances borrower qualification for young, first-time home buyers who are anticipated to have increasing incomes. The determination of the initial payment on a GPM mortgage is often regarded as complex; therefore, textbook authors normally disregard its theoretical development and substitute instead GPM interest factor tables. This study develops a general equation for finding the initial payment on a GPM and programmable calculator and computer spreadsheet routines for implementing the general equation. This approach enhances the technical understanding of the GPM, and it offers more flexibility than a table approach.

Private Home-ownership Finance for Low-income Households

German home-ownership rates are significantly lower than home-ownership rates in other nations. Perhaps attributable to several reasons, the ownership differential has become a major housing policy concern. This paper analyses the typical liquidity constraints for first-time home-buyers. It is well known that these constraints largely depend on the rate of inflation and result in credit rationing for investors whose income expectations are high but whose capital endowments are poor. Typically, this is the case for young families. Recently, German tax benefit schemes to promote home-ownership were rescheduled to avoid discrimination against young households. Still, the schemes place a high burden on public budgets. By contrast, the German Housing Policy commission proposed a scheme of home-ownership finance that combines private finance with a public pledge to overcome credit rationing. This paper examines the new proposal and its social, economic and fiscal implications.

Testing the Central Prediction of Housing Tenure Transition Models

Housing tenure choice is usually assumed to depend on relative tenure specific user costs, controlling for the household′s lifetime income. These models assume perfect capital markets. However, there is substantial evidence that potential first-time homebuyers face significant borrowing constraints. This paper proposes a tenure choice model, based on tenure transition theory principles, that recognizes the existence of both exogenous and endogenous liquidity constraints. It predicts that tenure choice depends centrally on a household′s liquefiable wealth, controlling for the asset price of housing. This prediction is tested using household survey data from both the United States and Canada.

Determinants of Bargaining Outcome in Single-family Housing Transactions: An Empirical Examination

Using a hedonic regression model, this paper examines determinants of bargaining outcome in single-family housing transactions. It divides potential factors into three broad categories: dwelling attributes, site amenities, and seller's and buyer's characteristics. Results with use of 1990 data for the Reno-Sparks area in Nevada show that bargaining outcome is determined by seller's asking price, buyer's household income, and some of the dwelling attributes and site amenities. This paper concludes that factors affecting housing price do not necessarily affect bargaining outcome, and first-time home buyers do not statistically bargain less than repeat home buyers.