Redistributive Effects of Monetary Conditions on Housing Credit Since Banking Deregulation

Overall objectives and specific aims: Homeownership is a policy goal in the US. On one hand, income inequality has been widening since the 1990s. On the other hand, banking branch deregulation, starting in the mid-1990s, resulted in increased mortgage supply by lowering inter-state geographical barriers. A natural question is how much gains in expanded mortgage supply have accrued to lower-income households. Further, credit supply responds to monetary conditions. Interest rates have been (mostly) falling since the deregulation, and esp. since the Great Financial Crisis. This raises the question of how monetary conditions affect credit supply across different income groups. This study investigates how monetary conditions influence mortgage lending for households with varying income levels in the US. In addition, how has this relationship changed since the financial crisis? How did the reforms introduced by the Dodd Frank Act in 2011 interact with monetary conditions to affect housing finance? How did the COVID-19 pandemic impact housing finance across income groups? The findings aim to guide policymakers in promoting equitable housing finance practices.Background and rationale: The existing research indicates that expansionary monetary policy can benefit low-income households in the short and medium term. However, there's a lack of empirical investigation into the long-term redistribution effects of monetary conditions, as they're often considered neutral over time. This study aims to bridge this gap by examining the redistributive effects of monetary conditions on mortgage credit allocation to households over an extended period, 1995-2021. Through this analysis, the research aims to shed light on potential redistributive outcomes of such policies and their implications for various income groups in the housing market.Methods: Our empirical strategy is based on the notion that local incomes tend to be correlated with local economic/housing conditions. We will utilize publicly available mortgage data from the Home Mortgage Disclosure Act (HMDA). The HMDA (panel) data provides valuable information at the census tract level, which aligns with the granularity of local income data available from a federal agency, the Department of Housing and Urban Development (HUD). Data on other control variables such as house price index, interest rates, and cost of intermediation are also widely publicly available. We will employ fixed-effect panel data regression methodology. We will regress mortgage credit on the interaction of interest rate and income at census tract level, while controlling for local-economic conditions and lender, year, and geographic fixed effects. An insignificant coefficient on the interaction term indicates income-neutrality, while a negative coefficient suggests regressive monetary conditions, impacting lower-income households more than higher-income ones.Expected results: We expect a publication in leading economics, finance, and banking journals, alongside presenting at renowned conferences like AEA, AFA, EEA, and EFA. Our outreach will extend to social media to engage a wider audience. Our findings will contribute comprehensive insights into the influence of monetary policy on income inequality in the housing market. Unlike short-term studies, our long-term analysis addresses the broader role of monetary policy in redistributive outcomes. Impact: Income inequality is a complex and slowly evolving variable that takes time to manifest its effects on long-term consumption. By examining the long-term dynamics of income inequality in relation to housing finance and monetary policy, our research has the potential to inform policymakers about the long-term implications of monetary policy decisions on income distribution and inequality, contributing to more equitable policymaking.