Returns to Homeownership and Inequality: Evidence from the First-Time Homebuyer Tax Credit��Maria Gindelsky, Jeremy Moulton, Kelly Wentland and Scott Wentland

Discussion by:

Sanket Korgaonkar

University of Virginia

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UNC Kenan Flagler Institute�Conference on Market-based Solutions for Reducing Wealth Inequality�April 25^th 2024

Summary

• Motivation:
• Long literature on homeownership and wealth gaps between minorities and non-minorities.
• Kermani and Wong (2024 WP): Minorities earn lower returns on their homeownership spells.

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• Research question:
• Why do minority households earn lower gross returns on their homeownership spells?

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• Approach:
• Experiment: Introduction of FHTC (Berger et al. (2020 JF))
• Empirical Method: Difference-in-difference (DD)
• Data: American Community Survey merged with ZTRAX Assessments and Transactions Data.

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Empirical approach: Main results

Implication: Wealth inequality begets wealth inequality

Comment 1: Empirical approach

Empirical approach: Difference-in-differences

Homebuyer Income

t = Pre-period

No FHTC, all home buyers effectively ineligible

Homebuyer Income

t = Post period

[ Eligible home buyers ] [ Ineligible home buyers ...

$150,000

Layered onto this are differences in home buyer minority status

Empirical approach: Difference-in-differences

• Concern: Post x Eligible positive coefficient driven by Eligible Non Takers?

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Homebuyer Income

t = Post period

[ Eligible home buyers ] [ Ineligible home buyers ...

$150,000

Compliers:

Eligible + Take up FHTC + Buy Home

Eligible Non Takers:

Eligible + Don’t take up FHTC + Buy Home

Ineligible Non Takers:

Inligible + Can’t take up FHTC + Buy Home

• Layered on to this is the race of the homeowner.
• Does ratio of Eligible Compliers to Non-takers vary by race? Perhaps.
• Minority population more likely to have Compliers (Charles and Hurst (2002) among others).

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Empirical approach: Location choice and returns

Comment 2: Mechanism

Mechanism

• Why do up-front capital requirements reduce homeownership returns? Two hypotheses that first come to mind:
• Homebuyers have less to reinvest into the home conditional on completing home purchase.
• Homebuyers are more likely to experience distressed sales.
• Both hypotheses are inconsistent with finding that FHTC had no effect on sale price.

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• Explanation in paper:
• FHTC enabled minority buyers to acquire homes where standard quality properties were purchased for fire-sale prices. Observe distressed purchase price, non-distressed sale price.
• Why is up-front capital pivotal to this? Is this a story about relaxing search and bargaining frictions?

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• Suggestion: Provide a simple conceptual framework (in words) to focus the reader on the specific constraints and frictions that you have in mind.

�Comment 3:�Comparison to FHA low down-payment loans

FHTC vs. high-LTV loans

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• High LTV loans imperfectly substitute for tax credit / grants.
• Relax short-term liquidity constraint but do not improve wealth position.

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• Informed welfare comparison depends on how tax credit recipients use additional wealth.
• Reinvest in home? Or expend on non-durable consumption?

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FHTC:

$100 Home Purchased

$80 Debt

$20 Equity

$8 Grant

Cash flow at purchase = -$12�∆ Assets = $88

∆ Wealth = $8

High LTV loan:

$100 Home Purchased

$88 Debt

$12 Equity

No credit/grant

Cash flow at purchase = $-12�∆ Assets = $88

∆ Wealth = $0

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Conclusion

• A paper on an important and urgent topic. Thank you for the opportunity to think through it!

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• Concerning finding: Wealth inequality begets wealth inequality.
• Wealth constrained borrowers experience up-front liquidity constraints that reduce returns conditional on entering homeownership.

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• To translate findings into policy and market-based solutions, understanding the nature of potential homebuyer constraints and frictions is crucial.
• For example, the optimal mortgage renegotiation strategies towards delinquent borrowers depends on whether they face liquidity or wealth constraints.
• Ganong and Noel (2020), Korgaonkar (2024)

Minor comments / suggestions

• Show the pre-trend analysis in the paper, or at least in the Appendix.
• Show the buy price and sell price result in the equivalent specification of Table 4.
• In the triple difference specification, show all the interaction terms.
• Summary stats table might also distinguish between pre and post sample for Treatment and control group since credit standards were changing dramatically at around the same time.

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