Working Paper #741
Borrowing Constraints during the Housing Bubble
Irina Barakova · Paul S. Calem · Susan M. Wachter
Borrowing Constraints Housing & Residential United States
The impact of borrowing constraints on homeownership has been well established in the literature. Wealth is most likely to restrict homeownership followed by credit and income. Using recent movers from the 1979 National Longitudinal Survey of Youth and borrowing constraint definitions commonly used in the literature, we examine the impact of these constraints on the probability of homeownership during the housing market boom between 2003 and 2007. We show that whereas the pool of financially constrained households expanded, the marginal impact of borrowing constraints associated with income and credit quality declined during this period. The fact that lending standards relaxed is accepted; however the impact of this on homeownership has not been previously studied. Here we find that loosened underwriting does appear to have reduced the impact of income and credit quality on homeownership but the impact of the wealth constraint persists.