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Financial Literacy: A Barrier to Home Ownership for the Young?

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Financial Literacy: A Barrier to Home Ownership for the Young?

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Abstract

The decision to buy a home is one of the most important choices faced by a household. Most young households who purchase a home do so using a mortgage. But mortgages are complex financial instruments and this complexity may be a barrier to less sophisticated households becoming homeowners. Using survey data from a sample of English and Welsh households we measure household financial literacy related to mortgages, including concepts such as loan duration, interest compounding and amortization. We find that in the population mortgage financial literacy is generally low and among renters mortgage financial literacy is substantially worse than among homeowners. Econometric estimates show mortgage financial literacy predicts home ownership for younger, but not for older households. Financial literacy also affects the type of mortgage and leverage position of younger households. Young homeowners with poorer financial literacy take on larger mortgage debts and are more likely to use alternative mortgage products.

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... According to [13], financial inclusion will help create jobs and provide income to MMSMe. A wide range of inclusivity in financial services is an essential requirement for economic growth, considering its ability to expand capital and induce investment [14], [4], [15]. ...
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... We define a large income shock here as being more than one-third of normal income. 7 See for details: Campbell (2006) Lusardi and Mitchell (2014) 8 See for details: Lusardi and Mitchell (2017), Lusardi and Mitchell (2011b), Lusardi and Mitchell (2011a) 9 See for details: Gathergood and Weber (2017) 10 See for details: Cupák et al. (2020), Calvet et al. (2007), Almenberg and Widmark (2011) 11 See for details: Allgood and Walstad (2016) ...
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... Further, homeownership contributes to higher degrees of financial literacy (i.e. mortgage choice-related knowledge) (Gathergood and Weber, 2017), which prevents people from high-cost borrowing practices. Conversely, individuals who are more knowledgeable of economic shocks and risk may want to invest in savings and other types of assets, including homeownership, which increases access to mainstream financial institutions (Williams, 2007). ...
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... Thus, the missing-income result might be interpreted as a broader socio-economic effect, perhaps acting through a financial literacy channel, with poorer and less educated households tending to have lower financial literacy; see, for example, Calvet et al. (2007Calvet et al. ( , 2009), Campbell et al. (2011) and Lusardi and Mitchell (2014). 14 In contrast, there are suggestions that home owners, which systematically predict lower price increases, might have higher financial literacy (Gathergood and Weber, 2017). However, the lack of any clear patterns for the actual reported income or education categories makes this financial literacy story highly tentative. ...
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International mortgage markets can play an important role in stimulating affordable housing markets and improving housing quality in many countries. Unfortunately, international mortgage markets are often less developed than in the United State. This lack of development often translates into lower homeownership rates or lower housing quality. The problems faced in international mortgage markets include but are not limited to (1) legal systems that delay foreclosure proceedings, (2) incomplete or weak financial institutions, (3) high inflation, and (4) cultural barriers to mortgage market development and homeownership.
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Regulators express growing concern over predatory loans, which we take to mean loans that borrowers should decline. Using a model of consumer credit in which such lending is possible, we identify the circumstances in which it arises both with and without competition. We find that predatory lending is associated with highly collateralized loans, inefficient refinancing of subprime loans, lending without due regard to ability to pay, prepayment penalties, balloon payments, and poorly informed borrowers. Under most circumstances competition among lenders attenuates predatory lending. We use our model to analyze the effects of legislative interventions.
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This paper investigates the effects of housing price risk on housing choices over the life-cycle. Housing price risk can be substantial but, unlike other risky assets which people can avoid, the fact that most people will eventually own their home creates an insurance demand for housing assets early in life. Our contribution is to focus on the importance of home ownership and housing wealth as a hedge against future house price risk for individuals moving up the ladder – people living in places with higher housing price risk should own their first home at a younger age, should live in larger homes, and should be less likely to refinance. These predictions are tested and shown to hold using panel data from the United States and Great Britain.
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After years of being relatively constant, the homeownership rate -a target for housing policy- has increased since 1995. This paper attempts to understand why the homeownership rate has been increasing by constructing a quantitative model and then using this model to evaluate explanations that have been offered to account for this increase. We find that the increase in the homeownership can be explained by innovations in the mortgage market that allows households to take a positive housing investment position with a much smaller downpayment.
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The conventional wisdom that homeownership is very risky ignores the fact that the alternative, renting, is also risky. Owning a house provides a hedge against fluctuations in housing costs, but in turn introduces asset price risk. In a simple model of tenure choice with endogenous house prices, we show that the net risk of owning declines with a household's expected horizon in its house and with the correlation in housing costs in future locations. Empirically, we find that both house prices, relative to rents, and the probability of homeownership increase with net rent risk. © 2005 MIT Press
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We study the impact of homeowning on the cognitive and behavioral outcomes of children. Using four waves of a comprehensive national panel data set, we control for many social, demographic and economic variables previously found to influence child outcomes. The data are a panel, allowing us to control for unobserved household- and child-specific factors. We use a treatment effects model to address the issue of possible sample selection bias caused by unobserved variables that influence both the parent's choice of whether to own or rent and whether to invest in their children. We find that owning a home compared with renting leads to a 13 to 23% higher quality home environment, greater cognitive ability and fewer child behavior problems. For children living in owned homes, math achievement is up to 9% higher, reading achievement is up to 7% higher, and children's behavioral problems are 1 to 3% lower. Copyright 2002 American Real Estate and Urban Economics Association.
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Using a switching regression technique we provide unique evidence on three questions concerning the consumption behaviour of UK households. First, what percentage of households display excess sensitivity to income? Second, what affects the likelihood of being in that group? Third, is there a collateral channel from house prices to consumption? We find 20%-40% of households display excess sensitivity. These households may be liquidity constrained or saving for other precautionary reasons. This is found to be more likely for those without liquid assets, with negative home equity, the young, unmarried, non-white and the degree-educated. According to the 'collateral channel', house prices influence consumption by allowing households that would otherwise be liquidity constrained to borrow on more attractive terms. A key implication of that view is that capital gains on housing should influence the consumption of the liquidity constrained/precautionary saving households, but not other households. We test that implication for the first time and find direct evidence in support.