Mortgage innovation was good for home ownership

In the United States, there have been two periods during which home ownership rates increased markedly: 1940's-1950's (47% to 65%) and since the mid 1990's (65% to now 70%). Why would there be so drastic increases interrupted by a long period of stable homeownership rates. Clearly this is difficult to justify with demographic changes, which are much more gradual than that. Another justification could be changes in the tax treatment of homeownership, but the timing is not right.

Matthew Chambers, Carlos Garriga and Donald Schlagenhauf say this is all due to innovations in mortgages. In particular, the creation of new mortgages that are more accessible to young households (low down-payment) during the 1990's help Americans to buy their first houses earlier. Also, pre-WWII, mortgages were for 10 years, interest only and thus implied a massive bill at the end. In the 1940's, the government encouraged longer maturities and amortization, which made buying a house less risky.

The real contribution of this article is to determine how much of the increase in homeownership can be attributed to new mortgage options. Chambers, Garriga and Schlagenhauf address this with a frighteningly rich model and they show that they can explain half of the ownership increase in the earlier period, and three quarters in the more recent one. So these new mortgage tools did something good, as long as we believe that home ownership should be encouraged, which is not obvious.