The Potential of Downpayment Assistance for Increasing Homeownership Among Minority and Low-Income Households

This study investigates the potential for downpayment assistance efforts, such as those provided through the American Dream Downpayment Act, to increase homeownership – both overall and among the low-income and minority households that are of special concern to policymakers. There are several ways in which this study adds to existing research. First, it evaluates the potential of downpayment assistance programs to stimulate homeownership by measuring the impact of cash grants on the propensity to own. Second, most tenure choice studies use cross-sectional samples of both owners and renters. But homeowners’ wealth will at least in part be the result of homeownership, rather than a cause. In contrast, this study avoids the endogeneity of wealth and homeownership by focusing exclusively on a sample of renter households. Third, by tracking renter households over time, it captures the ability of households to accumulate savings, reduce expenses, and/or increase income to achieve homeownership – all dynamic aspects of the tenure transition process that are not captured by cross-sectional analysis. Finally, the period of study, 1997 to 2000, was a time of ready availability of low downpayment mortgage products. Thus, the study sheds light on the importance of wealth constraints at a time when renters could benefit from these mortgage market innovations.