Linking Consumer and Lender Perspectives in Home Buying: a Transaction Price Analysis

The linkage between consumer and lender perspectives in home buying is explored. The realized transaction price in the home buying exchange is used to conceptualize this association. A framework for modeling the home purchase decision from the perspective of both lenders and buyers is presented. Data from a sample of home buyers in the northeastern United States is used to test the models. Results indicate the lender and consumer models developed provide complementary insights into the market determination of homeownership. Findings highlight the emerging significance of psychological expectations and perceptions in the homeownership decision in addition to known income and demographic effects. Implications for public policy on housing are offered. Homeownership has emerged as one of the most significant public policy issues of the 1990s. While preferences for owning a home are strong in the U.S. (Eppli and Childs 1995; Paulin 1995; Spiers 1994), there are concerns about the lack of homeownership among certain segments of society. A 1995 report by the Joint Center for Housing Studies at Harvard University shows that the homeownership rate decreased by nine percentage points between 1980 and 1992 among the twenty-five to thirty-four-year-old age group. Historically, this population segment has been the most likely group of first time home buyers. Proportionate declines are observable for other demographic groups. Estimates also indicate that by the turn of the century a higher proportion of homeowners will include single persons, minorities, immigrants, and the elderly (Masnick and Kim 1995). Some of these groups, such as low-income minorities and immigrants, have had lower levels of homeownership due to affordability constraints (McArdle and Masnick 19 95). Significant public funds have been appropriated since the early 1970s to expand the supply of affordable housing and to promote homeownership among nonowners. The Low Income Housing Tax Credit (LIHTC) Program created in 1986 and Homeownership Made Easy (HOME) program created in 1990 are examples of these ongoing efforts. However, some policy advocates have questioned the wisdom (and effectiveness) behind these income subsidy programs in promoting homeownership. Budgetary cuts are being considered in both programs because of the prevailing skeptical mood in Congress. The decline in homeownership levels continues in spite of the recent stabilization in housing prices. According to the National Association of Realtors, homeownership is more affordable now than it has been at any time since the mid-1970s. Thus, the market for owner-occupied housing appears to be in a state of transformation. Therefore, understanding the basis for these structural changes is important for formulating public policy on housing. A home is often the household's largest consumer durable good as well as a part of the investment portfolio. In some cases it is the household's only significant asset and represents a lifetime of savings (Johnson 1996). Psychologically, a home can be a measure of independence and status, or it may bestow a pride of ownership--in the language of real estate brokers (VanderHart 1994). There are both economic and psychic benefits/costs associated with the decision to own a home (Robe and Stegman 1994). Because of the economic and demographic trends mentioned above, income may not have the same constraining influence on homeownership decisions as it has in the past. Rather, perceptions relating to the costs of homeownership may turn out to be more salient. Similarly, attitudes and expectations relating to psychological benefits of homeownership may also become more important. Hence, it is necessary to understand the role these factors play in the decision to own a home. Housing policy in the future may need to be directed at reducing the non-financial challenges of homeownership (Brendsel 1996; HUD 1995). In order for public policy makers to adequately address housing ownership issues and the related concern of housing affordability, a more complete understanding of the home buying decision is needed. …