Impact of Increasing Minimum Wage on Homeownership and Home Equity Loans

Abstract

The U.S. housing market has not completely recovered from the Great Recession and is likely to tumble into another dive. Meanwhile, multiple proposals have been put forward nationwide to raise the minimum wage, which in turn might affect low income families’ purchasing power and consumer demand. Therefore, it is important to examine the potential impact of increasing the minimum wage on the housing market. One of the lessons from the 2007 downturn is that awarding a mortgage to individuals who have low ability to pay should be taken with great care. Using the American Community Survey 2009 and the fuzzy design regression discontinuity model, it was discovered that households of minimum wage level workers were 8% more likely to have a mortgage and 11% more likely to take out a home equity loan than those of workers whose annual incomes were a little above the minimum wage level. This may be due to new confidence about income security, better credit scores and higher likelihood of being approved for big loans that are associated with their slightly higher income and enhanced ability to pay bills. Taking out large loans, such as a mortgage or a home equity loan, after a small increase in income might be a risky decision for both consumers and the housing market. It is critical for policymakers and markets to notice potential issues before advocating for higher minimum wages.