Journal of Real Estate Finance and Economics, 25:2/3, 243±267, 2002
# 2002 Kluwer Academic Publishers. Manufactured in The Netherlands.
The Role of Interest Rates in In¯uencing Long-Run
School for Policy, Planning, and Development, Lusk Center for Real Estate, University of Southern California,
CHRISTIAN L. REDFEARN
Marshall School for Business, Lusk Center for Real Estate, University of Southern California, U.S.A.
As a stated policy objective, the U.S. Department of Housing and Urban Development (HUD) seeks to boost the
national homeownership rate to 70 percent by 2006. To accomplish this goal, they estimate that 3.8 million
additional families be added to the ranks of U.S. homeowners. Furthermore, HUD estimates that the
homeownership gap between minority and nonminority families must be reduced by a full 15 percent. Many
policy instrumentsÐboth targeted and otherwiseÐhave been suggested to increase homeownership. These range
from low downpayment loans, greater access to credit in underserved areas, and interest rates subsidies. However,
little is know about the ef®cacy of these measures to raise long-term homeownership rates.
In this analysis, we focus on the role of interest rates on homeownership rates and the housing stock. In
particular, we provide a critical review of the literature on the relationship between housing and interest rates in
contrast to other determinants of homeownership and changes in housing supply. We then present our own
estimates of the in¯uence of interest rates on homeownership and housing starts. We ®nd that interest rates play
little direct role in changing homeownership rates. While changes in interest rates may affect the timing of
changes in tenure status from renter to owner, the long-run ownership rate appears independent of interest rates.
We ®nd housing starts are, however, sensitive to changes in the interest rate. This implies that housing supply,
or at least the timing of changes in housing supply, is sensitive to interest rates. It is though this mechanism that
the stock of owner-occupied housing expands, though household formation and immigration may leave the
ownership rate unchanged. We conclude by discussing whether other instruments, such as low down payment
loans and improved technology for assessment of credit risk, may potentially be better suited to increasing long-
term homeownership rates.
Key Words: homeownership, housing supply, interest rates
In recent years, substantial academic research and policy debate has been undertaken
examining the access to, and importance of, homeownership. This is appropriate given
residential real estate's signi®cance within a portfolio of household assets and its
importance to national accounts. Adwelling is the single largest purchase that most
households will make and plays a starring role in the ``American Dream.'' It has been
reported that, relative to renting, homeownership generates neighborhood bene®ts related
to property upkeep, public safety, school quality, and the like (see, for example, Green and