Down Payments and the Homeownership Dream:
Not Such a Barrier After All?
April 3, 2019
Homeownership has long been central to America’s national identity as a symbol of economic opportunity. The US government spends billions of dollars on down payment assistance and other direct aid each year while also guaranteeing government-sponsored enterprises that facilitate the origination of low-down payment, high-leverage mortgages. This research from Aaron Hedlund examines the effect of down payment requirements on rates of homeownership in the US. He finds that homeownership rates do not exhibit any significant long-run relationship with the size of minimum down payments.
Down Payments Affect Homeownership in the Short Run
- Increases in minimum down payment requirements—whether induced by changes in government subsidies, regulations, or economic conditions faced by lenders—create temporary declines in homeownership.
- Most of the decline comes from a reduced flow of renters into homeownership rather than an increased exit rate of homeowners back into renting.
But Not So Much in the Long Run
- While the short-term homeownership rate may be affected, the long-run homeownership rate is insensitive to down payment requirements.
- Renters increase their savings rate in response to higher down payment requirements, which causes the homeownership rate to gradually recover.
Credit Still Matters
- These time-varying effects of down payment requirements are consistent with the relative stability of the homeownership rate over the past 50 years.
- The cost of credit as measured by mortgage rates has a far more durable impact on the long run homeownership rate than down payment requirements.
The results of this research suggest that low down payments are not a precondition to achieving a robust long-run homeownership rate. Policymakers do not have to choose between supporting homeownership and promoting a stable financial system. Instead, these results suggest that those interested in promoting homeownership should expand their horizons beyond subsidizing high-leverage mortgages to consider alternatives that do not risk exacerbating macroeconomic fragility.