Did Housing Policies Cause the Postwar Boom in Homeownership?

Abstract

After the collapse of housing markets during the Great Depression, the U.S. government played a large role in shaping the future of housing finance and policy. Soon thereafter, housing markets witnessed the largest boom in recent history. The objective in this paper is to quantify the contribution of government interventions in housing markets in the expansion of U.S. homeownership using an equilibrium model of tenure choice. In the model, home buyers have access to a menu of mortgage choices to finance the acquisition of a house. The government also provides special programs through provisions of the tax code. The parameterized model is consistent with key aggregate and distributional features observed in the 1940 U.S. economy and is capable of accounting for the boom in homeownership in 1960. The decomposition suggests that government policies have significant importance. For example, the expansion in maturity of the fixed-rate mortgage to 30 years can account for 25 percent of the increase. Housing policies, such as the introduction of the mortgage interest deduction, can account for 13 percent of the increase in homeownership.

Keywords: Housing …finance, fi…rst-time buyers, life-cycle

JEL Classification: E2, E6