Skill-Biased Technological Change and Homeownership

In the United States, the residential housing market went through important changes over the period of the 1970s to the mid-1990s. Although the aggregate homeownership rate was relatively constant during that period, the distribution of homeownership rates by age changed in remarkable ways. While younger households saw substantial declines in homeownership rates, the opposite happened for older households. In this paper, we argue that the skill-biased technological change (SBTC) that occurred during the 1970s has been an important factor behind the observed change in the distribution of homeownership rates by age. We build a life cycle model in which skills are accumulated on-the-job through experience: learning by doing. Early in life, households have lower levels of skills and therefore lower earnings. Accordingly, SBTC increases the returns to skill, widening the wage gap between young and old ages. As a consequence, it takes more time for young households to accumulate down payments and become homeowners, in line with consumption smoothing behaviour. On the other hand, older households that could not afford a house before may now have sufficient funds to become homeowners, given higher returns to skill. Our analysis confirms this conjecture, namely, the SBTC shifts the distribution of homeownership from the young to the old.