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Downpayment Assistance Can Increase Homeownership

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HUD recently released a study that evaluates the impact of
downpayment assistance on homeownership rates. It analyzes
detailed information about 11,000 renter households for
the period of 1997-2000. During this time, 18 percent of
these renters became homeowners. Approximately one-half of
these new homeowners held less than $1,000 in liquid
financial assets at the beginning of the period. Findings
confirm that the amount of money held in liquid assets
such as bank accounts, certificates of deposits, and
mutual funds is a reliable predictor of homeownership.
However, the largest impact on the probability of becoming
a homeowner was associated with savings of less than
$1,000, while larger amounts of savings had a diminishing
effect on the probability of purchasing a home.

This indicates that small amounts of downpayment
assistance can be effective in a renter's decision to
purchase a home. For example, in a computer simulation, a
grant of only $1,000 to a low-income home renter, as an
incentive to purchase a home, was estimated to produce a
19 percent increase in the number of homebuyers. As
reflected in the finding of an inverse relationship
between savings size and the decision to buy a home, the
simulation shows that higher levels of assistance have a
decreasing impact on the probability of homebuying.
Although the cost of granting $1,000 to every low-income
household would be high, limiting assistance to those
households most likely to purchase a home would keep the
cost within the annual expenditure of $200 million
authorized by the American Dream Downpayment Act (2003).

The report describes the data and the method used for
simulating the effects of downpayment assistance, reviews
pertinent literature, and tests the impact of such
variables as race/ethnicity, marital status, education
level, and economic factors on the probability of
homeownership. The report explores what might account for
the patterns found and discusses other contributing
factors to a homebuying decision.

Data used for this study came from the Survey of Income
and Program Participation (SIPP), a nationally
representative, longitudinal survey of households that
gathers detailed information about income and wealth as
well as other household characteristics. SIPP over-samples
the low-income population to ensure a large sample of
households eligible for government assistance.

The full text of this study, "The Potential of Downpayment
Assistance for Increasing Homeownership Among Minority and
Low-Income Households," is available as a free download at
https://www.huduser.gov/portal/publications/homeown/downpayasstlih.html
or in printed form for a nominal charge by calling
HUD USER at 1-800-245-2691.

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