Date Added: Feb 2011
There is clear evidence that many low-to-moderate-income homebuyers are wealth-constrained; therefore, a dollar spent in down-payment subsidies is more successful at creating new homebuyers than a dollar spent in interest-rate subsidies. However, the recent crisis raised the important questions of whether these new homebuyers can actually remain homeowners in the long run and how much it costs to create successful new homeowners. This paper is an attempt at answering those questions. The author finds that a dollar spent on interest-rate subsidies is not only less effective at encouraging homeownership than down-payment subsidies, but also less effective at reducing defaults.