Earnings Persistence, Homeownership Pro\u85le, Residential Mobility and Increasing Mortgage Debt

In between 1983 to 2004, (i) U.S. average consumer debt, mostly collateral backed, has increased from 124 percent to 206 percent of average labor income; (ii) cross-sectional earnings inequality, as measured by the Gini index, has increased; (iii) housing downpayment requirements have decreased; (iv) the homeownership rate among the 20-35 and 60-75 age groups have increased; (v) and residential mobility rates have decreased. I link those facts through a general equilibrium, overlapping-generations model with a liquid \u85nancial asset and both housing and renting markets. Households access debt through collateralized lending. I show that if permanent shocks are the driving force behind earnings inequality then the pre-cautionary saving motive is weak and households are more often at the borrowing limit. Relaxing the collateral constraints then, increases householdsaccess to mort-gage debt and their homeownership rate. High earnings persistence also reduces the need to adjust the housing stock to self-insure against variability in non-durable consumption, thus lowering housing mobility rates