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  5. Inequality in Mortgage, Capital, and Credit Markets
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Inequality in Mortgage, Capital, and Credit Markets

Paper Session

Saturday, Jan. 4, 2025 2:30 PM - 4:30 PM (PST)

Hilton San Francisco Union Square, Union Square 15 and 16
Hosted By: Society of Government Economists
  • Chair: Prakash Loungani, Johns Hopkins University

Home Purchase Appraisals in Minority Neighborhoods

Daniel Grodzicki
,
Federal Housing Finance Agency
Sean Cannon
,
Federal Housing Finance Agency
Ken Lam
,
Federal Housing Finance Agency
Christopher W. Davis
,
Federal Housing Finance Agency

Abstract

We study the impact of a neighborhood's racial composition on the likelihood of appraisals below the agreed upon buyer-seller (contract) price, or low appraisals. Low appraisals place significant burdens on a transaction, triggering higher payments, worse loan terms, and denial of credit. Over time, they can depress local home values and may help explain enduring economic inequality stemming from geographic segregation along racial lines. Our analysis uses data from the Federal Housing Finance Agency's Uniform Appraisal Dataset (UAD) for the period 2015-2020. These data encompass universe of appraisals submitted to Fannie Mae and Freddie Mac over that time, including those not tied to a transacted sale. This is consequential because appraisal outcomes are intimately tied to the likelihood of a successful transaction. A simple association between race and low appraisals reveals that, as compared to a Census tract with no African American residents, a low appraisal is 66% more likely in a majority African American tract. However, about half of this difference results from variation in observed property, market, neighborhood, and appraiser characteristics, the latter two factors accounting for over 80 percent of this attenuation. The impact of race is about 2/3 as large as that suggested by the association. Moreover, it is non-linear and concentrated in high-minority neighborhoods. We identify this effect by applying an instrumental variable design using a neighborhood's racial profile in 1970, a half century prior to our analysis period. This identification relies on differential persistence in the unobserved processes driving neighborhood race and unobserved factors of housing values. We explore the mechanisms underlying this effect. Theories of discrimination have identified two main types: taste-based, and statistical. The latter contends that race functions as a substitute for missing specific information about individuals or groups.

Price Discrimination and Adverse Selection in the U.S. Mortgage Market

Hannah Huihan Zhang
,
Boston University and Amazon

Abstract

This paper documents substantial price dispersion in the U.S. mortgage market, where each given lender charges observably similar borrowers different interest rates for similar loans. To explain the conditional price dispersion, we estimate a structural model that features borrowers’ demand for mortgages and lenders’ individualized optimal pricing decisions. The evidence is consistent with adverse selection in the form of a positive correlation between the unobserved determinants of borrowers’ demand and lenders’ costs. Moreover, lenders’ ability to learn borrowers’ private information from signals and tailor interest rates alleviates the severity of adverse selection. Signals convey more information about lenders’ costs rather than borrowers’ demand, implying that the conditional price dispersion is explained more by lenders’ optimal risk adjustments rather than demand-based price discrimination. In a counterfactual scenario where lenders must set the same interest rates for the observably same borrowers, interest rates increase, and consumer surplus decreases. The effect is heterogeneous across income groups with higher-income borrowers’ interest rates increasing more.

Racial Disparities in Credit and Debt and the Effectiveness of State Initiatives to Protect Young Adults Living in Communities of Color During Volatile Economic Times

Kassandra M. Martinchek
,
Urban Institute

Abstract

Young adults who experience a recession may experience long-term declines in their employment and earnings potential that undermine their ability to establish financial stability. Such challenges may especially be relevant for young adults living in communities of color, as macroeconomic downturns may worsen structural disparities in financial outcomes along racial lines. During the pandemic recession, many states implemented emergency measures that may have both protected young adults from experiencing long-term declines in credit health and prevented widening racial inequities. Using 18 waves of credit data on 850,000 young adults ages 20-29 from February 2020 to August 2023, I examine how community-level racial disparities in young adults’ credit health changed post-pandemic, community-level explanatory factors of racial disparities in credit, and the impact of extended unemployment insurance programs and utility shutoff moratoria on young adults’ delinquencies and credit scores. I use OLS, Oaxaca-Blinder decompositions, exact matching, and TWFE difference-in-difference models to answer these questions. I test the robustness of TWFE estimates on subsamples of young adults (a) living in communities of color, (b) without student loans at baseline, and (c) living in contiguous border counties; as well as estimating impacts using policy discontinuities at state borders similar to work by Dube, Lester, and Reich (2010) and Schmidt, Shore-Sheppard and Watson (2020). I find that despite elevated levels of economic volatility between 2020 and 2023, young adults living in communities of color experienced relative improvements in their credit health that narrowed racial inequities early in the pandemic. However, these gains showed signs of reversing by August 2023—ultimately worsening racial inequities in credit relative to pre-pandemic levels. These community-level racial disparities in credit were likely driven by differences in wealth-building opportunities across communities in addition to differences in education, incomes, employment, and homeownership.

Capital Flows, Income Inequality, and Housing Prices

Marco Pani
,
International Monetary Fund
Sergio Martinez Cotto
,
University of St. Gallen

Abstract

This paper addresses how housing prices respond to global financing conditions, fiscal policy, and productivity shocks using a stylized model that accounts for interactions between international capital movements, relative prices, and income inequality. The analysis highlights that international capital flows affect real housing prices both by changing the equilibrium real exchange rate (and hence the price of non-tradable real estate) and by altering income distribution (and hence the relative income of the marginal home buyer). Fiscal policies aimed at reducing income inequality have different impacts on housing prices depending on their targeting, coverage, and on the share of homeowners in the population. Exogenous productivity shocks have a different impact depending on which sector is hit, and external financing can mitigate these effects in real terms but in some cases amplify the change in nominal prices.

Discussant(s)
Richard Koss
,
Columbia University and Recursion Co.
Karan Bhasin
,
SUNY-Albany
Deniz Igan
,
Bank for International Settlements
Enrique Martinez-Garcia
,
Federal Reserve Bank of Dallas
JEL Classifications
  • G0 - General
  • J1 - Demographic Economics